Problem 7–10
Requirement 1
February 28, 2018
Note receivable……………………………………………………… 10,000
…………………………………………………………Sales revenue
…………………………………………………………………………10,000
March 31, 2018
Note receivable (face amount)……………………………………. 8,000
………………………………Discount on notes receivable ($8,000 x 10%)
……………………………………………………………………….800
………………………………………….Sales revenue (difference)
…………………………………………………………………………..7,200
April 3, 2018
Accounts receivable……………………………………………….. 7,000
…………………………………………………………Sales revenue
…………………………………………………………………………..7,000
April 11, 2018
Cash (98% x $7,000)…………………………………………………. $6,860
Sales discounts (2% x $7,000)……………………………………. 140
………………………………………………..Accounts receivable
…………………………………………………………………………..7,000
April 17, 2018
Sales returns………………………………………………………….. 5,000
………………………………………………..Accounts receivable
…………………………………………………………………………..5,000
Inventory………………………………………………………………. 3,200
………………………………………………….Cost of goods sold
…………………………………………………………………………..3,200
Problem 7–10 (continued)
April 30, 2018
Cash (99% x $50,000)………………………………………………… 49,500
Loss on sale of accounts receivable (1% x $50,000)……… 500
………………………………………………..Accounts receivable
…………………………………………………………………………50,000
To accrue interest on note receivable for four months:
June 30, 2018
Interest receivable………………………………………………….. 333
………………………………………………..Interest revenue ($10,000 x 10% x 4/12)
……………………………………………………………………….333
To record discounting of note receivable:
June 30, 2018
Cash (proceeds determined below)………………………………… 10,266
Loss on sale of note receivable (to balance)…………………. 67
……………………….Interest receivable (from adjusting entry)
……………………………………………………………………….333
…………………………………….Note receivable (face amount)
…………………………………………………………………………10,000
$10,000 Face amount
583 Interest to maturity ($10,000 x 10% x 7/12)
10,583 Maturity value
(317) Discount ($10,583 x 12% x 3/12)
$10,266 Cash proceeds
September 30, 2018 — NO ENTRY REQUIRED
Problem 7–10 (concluded)
Requirement 2
To accrue nine months’ interest on the Maddox Co. note receivable:
Discount on notes receivable…………………………………… 600
…………………………………………………Interest revenue ($8,000 x 10% x 9/12)
……………………………………………………………………….600
Requirement 3
Income
Date increase (decrease)
February 28 $10,000
March 31 7,200
April 3 7,000
April 11 (140)
April 17 (5,000)
April 17 3,200
April 30 (500)
June 30 333
June 30 (67)
December 31 600
Total effect $22 ,626
Problem 7–11
Note
Note Face
Value
Date of
Note
Interest
Rate
Date
Discounted
Discount
Rate
Proceeds
Received
1 $50,000 3-31-16 8% 6-30-16 10% $50,350 (1)
2 50,000 3-31-16 8% 9-30-16 10% 51,675 (2)
3 50,000 3-31-16 8% 9-30-16 12% 51,410 (3)
4 80,000 6-30-16 6% 10-31-16 10% 81,027 (4)
5 80,000 6-30-16 6% 10-31-16 12% 80,752 (5)
6 80,000 6-30-16 6% 11-30-16 10% 81,713 (6)
(1)
$50,000 Face amount
3 ,000 Interest to maturity ($50,000 x 8% x 9/12)
53,000 Maturity value
(2 ,650) Discount ($53,000 x 10% x 6/12)
$50,350 Cash proceeds
(2)
$50,000 Face amount
3 ,000 Interest to maturity ($50,000 x 8% x 9/12)
53,000 Maturity value
(1 ,325) Discount ($53,000 x 10% x 3/12)
$51,675 Cash proceeds
Problem 7–11 (concluded)
(3)
$50,000 Face amount
3 ,000 Interest to maturity ($50,000 x 8% x 9/12)
53,000 Maturity value
(1 ,590) Discount ($53,000 x 12% x 3/12)
$51,410 Cash proceeds
(4)
$80,000 Face amount
2 ,400 Interest to maturity ($80,000 x 6% x 6/12)
82,400 Maturity value
(1 ,373) Discount ($82,400 x 10% x 2/12)
$81,027 Cash proceeds
(5)
$80,000 Face amount
2 ,400 Interest to maturity ($80,000 x 6% x 6/12)
82,400 Maturity value
(1 ,648) Discount ($82,400 x 12% x 2/12)
$80,752 Cash proceeds
(6)
$80,000 Face amount
2 ,400 Interest to maturity ($80,000 x 6% x 6/12)
82,400 Maturity value
(687) Discount ($82,400 x 10% x 1/12)
$81,713 Cash proceeds
Problem 7–12
Requirement 1
In addition to sales revenue of $1,340,000, the 2019 income statement will
include (1) interest revenue, (2) bad debts expense, and (3) loss on sale of note
receivable.
Interest revenue
$200,000 note: $200,000 x 6% x 3/12 = $3,000
$60,000 note: $ 60,000 x 8%(1) x 10/12 = 4 ,000
Total interest revenue $7,000
(1) The interest rate on the $60,000 note can be determined as follows:
Interest receivable in 12/31/2018 balance sheet = $6,800
Less: Interest on $200,000 note: $200,000 x 6% x 6/12 = (6 ,000)
Interest on $60,000 note $ 800
$800 represents interest for two months (November and December of 2018) or
$400 per month. Annual interest is $400 x 12 = $4,800.
$4,800 $60,000 = 8% interest rate.
Bad debt expense
Analysis of accounts receivable
Beginning accounts receivable ($218,000 + 24,000) $ 242,000
Add: Credit sales 1,340,000
Less: Cash collections (1,280,000)
Less: Write-offs (22 ,000)
Ending accounts receivable $ 280 ,000
Analysis of allowance for uncollectible accounts
Beginning allowance $24,000
Add: Bad debt expense ?
Less: Write-offs (22 ,000)
Ending allowance(2) $28 ,000
Therefore bad debt expense is $26,000 ($24,000 – 22,000 – 28,000)
(2)$280,000 x 10% = $28,000
Problem 7–12 (concluded)
Loss on sale of note receivable
Interest accrued on the $200,000 note for nine months (6/30/2018 to
3/31/2019):
$200,000 x 6% x 9/12 = $9,000
Calculation of cash proceeds received from discounting note:
$200,000 Face amount
12 ,000 Interest to maturity ($200,000 x 6%)
212,000 Maturity value
(4 ,240) Discount ($212,000 x 8% x 3/12)
$207,760 Cash proceeds
Carrying value of note $209,000 ($200,000 + 9,000 interest receivable)
Less: Cash proceeds (207 ,760)
Loss on sale of note receivable $ 1,240
Requirement 2
Accounts receivable, net of $28,000 in allowance for
uncollectible accounts $252,000
Requirement 3
Accounts receivable turnover ratio:
$1,340,000
————- = 5.7 times
$235,000(3)
(3)($218,000 + 252,000) 2 = $235,000
Problem 7–13
Requirement 1
Computation of balance per books:
Balance per bank statement $14,632.12
Add: Deposits outstanding 575.00
Deduct: Checks outstanding (1,320.25)
Error in recording rent check (18.00)
Add: Automatic mortgage payment 450.00
Add: Bank service charges 14.00
Deduct: Deposit credit to company’s
account in error (875.00)
Add: NSF check charge 85.00
Balance per books $13 ,542.87
Step 1: Bank Balance to Corrected Balance
Balance per bank statement $14,632.12
Add: Deposits outstanding 575.00
Deduct:
Bank error—deposit incorrectly
credited to company account (875.00)
Checks outstanding (1 ,320.25)
Corrected cash balance $13 ,011.87
Step 2: Book Balance to Corrected Balance
Balance per books $13,542.87
Add: Error in recording rent check 18.00
Deduct:
Automatic mortgage note payment (450.00)
Service charges (14.00)
NSF checks (85.00)
Corrected cash balance $13 ,011.87
Problem 7–13 (concluded)
Requirement 2
To correct error in recording cash disbursement for rent:
Cash………………………………………………………….. 18
………………………………………………Rent expense
………………………………………………………………18
To record credits to cash revealed by the bank reconciliation:
Interest expense………………………………………….. 350
Mortgage note payable………………………………… 100
Miscellaneous expense (bank service charges).. 14
Accounts receivable (NSF checks)……………….. 85
…………………………………………………………..Cash 5
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Requirement 3
Checking account balance $13,011.87
Petty cash 200.00
U.S. treasury bills 5 ,000.00
Total cash and cash equivalents $18 ,211.87
Problem 7–14
Requirement 1
Step 1: Bank Balance to Corrected Balance
Balance per bank statement $3,851
Add: Deposits outstanding 2,150 (1)
Deduct:
Bank error—deposit incorrectly
credited to company account (1,300)
Outstanding checks (831) (2)
Corrected cash balance $3 ,870
Step 2: Book Balance to Corrected Balance
Balance per books $4,422
Deduct:
Error in recording check #411 (90)
Service charges (22)
NSF checks (440)
Corrected book balance $3 ,870
(1) Receipts $42,650
Less: December receipts deposited:
Bank deposits $43,000
Less: Deposit error (1,300)
Less: Prior month’s
deposits outstanding (1 ,200) 40 ,500
Deposits outstanding, Dec. 31 $ 2 ,150
(2) Dec. disbursements $41,853
Error in recording check #411 90
Less: December checks cleared:
Total checks cleared $41,918
Prior month’s checks:
#363 $123
#380 56
#381 86
#382 340 (605) (41 ,313)
December checks outstanding 630
Add: check # 365 201
Total checks outstanding, Dec. 31 $ 831
Problem 7–14 (concluded)
Requirement 2
To record credits to cash revealed by the bank reconciliation:
Advertising expense……………………………………. 90
Miscellaneous expense (bank service charges).. 22
Accounts receivable (NSF checks)……………….. 440
…………………………………………………………..Cash 5
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