P8-12. Reconstructing T-accounts (LO 8-12)
Requirement 1:
Allowance for doubtful
accounts
Gross accounts
receivable
Journal Entries
Requirement 2:
Year 3 Year 2 Year 1
Provision for doubtful accounts
DR CR
Allowance for doubtful accounts
Balance sheet presentation of receivables (Year 3)
Note: Altering the Year 3 provision for doubtful accounts does not
change gross accounts receivable.
The revised operating income is calculated below:
Year 3
Note that the operating income would have decreased by 34% if
Ramsay
had reported the Year 3 bad debts at the same percentage of
revenue
Requirement 3:
Year 3 Year 2
Revised balance in allowance account
DR CR
Allowance for doubtful accounts
The revised operating income is calculated below:
Year 3
Year 3
The above table suggests that Ramsay would have reported almost
$5 million of additional receivables at the end of Year 3 if the
receivables balance continued to be 23.21% of revenue. This
The intertemporal pattern of the bad debt provision is also
consistent with this intuition:
Year 3 Year 2 Year 1
Provision for doubtful accounts as
However, an analyst should obtain corroborating information from
the management to further substantiate this inference. This is
because the observed trend in the provision for doubtful accounts is
P8-13. Restructuring a note receivable (LO 8-8)
Requirement 1:
Settlement of note receivable by taking aircraft in exchange for note
receivable:
January 1, 2017:
No additional journal entries are required.
Requirement 2:
Restructuring of note receivable by taking cash and new note
receivable in exchange for original note receivable:
Calculation of Restructuring Loss
Restructured note receivable:
PV of interest payments
($4,200 x 3.99271, the present value factor
January 1, 2017:
Note Receivable Amortization Table
( a ) ( b ) ( c ) ( d )
Date Interest income:
[prior (d) x 8%]
Cash payment
received
(given)
Increase (decrease) in
Note receivable: [(a) –
(b)]
Note
receivable:
[prior (d) + (c )]
*rounded
December 31, 2017:
DR Cash $ 4,200
December 31, 2018:
DR Cash $ 4,200
December 31, 2019:
DR Cash $ 4,200
P8-14. Restructuring a note receivable (LO 8-8)
Requirement 1:
Mikeska Companies
1/1/14: To record the fully depreciated asset at its fair value:
DR Equipment
$12,000
CR Gain on disposal of asset $12,000
To record the settlement:
DR
$72,000
DR
3,600
$30,000
12,000
CR Gain on debt restructuring 33,600
Power-line Manufacturing
To record the settlement:
DR
Cash
$30,000
DR
Equipment
12,000
DR
Loss on receivable restructuring
33,600
CR Note receivable
$72,000
CR Interest receivable 3,600
Requirement 2:
Mikeska Companies
1/1/14: To record the modified sum:
Calculation of Discount Rate:
Present value = future value x present value factor (3 years, ??
interest
rate) i.e., $75,600 = $86,400 x present value factor (3 years, ??
interest rate)
Dividing both sides by $86,400, we have
Alternately, this can also be obtained by interpolation.
Present value of Restructured Present value of
future flows @ 4% note amount future flows @ 5%
$1,209.60
Then,
82.173,2$
60.209,1$
= .556
So the interpolated rate is 4% + .556% or 4.556%.
12/31/14: To record interest payable:
[$75,600 x 4.556% = $3,444]
Interest expense is calculated at 4.556% of the book value of the
notes payable as of January 1, 2017.
12/31/18: To record interest payable:
[($75,600 + $3,444) x 4.556% = $3,602]
12/31/19: To record interest payable:
‡rounded
12/31/19: To record payment of amount due:
Power-line Manufacturing
1/1/17: To record the modified sum:
Note: The restructured note is valued at $74,636, the present value
of $86,400 to be received in three years discounted at 5%. The
factor is .86384.
12/31/17: To record interest receivable:
12/31/18: To record interest receivable:
12/31/19: To record interest receivable:
12/31/19: To record receipt of amount due:
Requirement 3:
Mikeska Companies
1/1/19: To record the modified sum:
12/31/19: To record payment of amount due:
Power-line Manufacturing
1/1/17: To record the modified sum:
Note: The restructured note is valued at $62,196, the present value
of $72,000 to be received in three years discounted at 5%. The
factor is .86384.
12/31/17: To record interest receivable:
[($62,196 + $3,110) x 5% = $3,265]
12/31/19: To record interest receivable: