EXERCISE 7.5 (Continued)
(b)
July 29
Cash ……………………………………………………….
2,000
Accounts Receivable—Arquette …………………………
1,960
Sales Discounts Forfeited …………………………..
40
EXERCISE 7.6 (5–10 minutes)
July 1
Accounts Receivable ………………………………………………
Sales Revenue ……………………………………………….
30,000
July 10
Cash ……………………………………………………….
Sales Discounts ………………………………………………………
Accounts Receivable …………………………..
30,000
Accounts Receivable ………………………………………………
Sales Revenue ……………………………………………….
Cash ……………………………………………………….
Accounts Receivable …………………………..
EXERCISE 7.7 (10–15 minutes)
(a)
Bad Debt Expense …………………………………………………..
3,000
Allowance for Doubtful Accounts …………………….
3,000*
(b)
Bad Debt Expense …………………………………………………..
6,500
Allowance for Doubtful Accounts …………………….
6,500*
EXERCISE 7.8 (5–10 minutes)
(a)
Allowance for Doubtful Accounts …………………………..
8,000
Accounts Receivable …………………………..
8,000
(b)
Accounts Receivable ………………………………………………
Less: Allowance for Doubtful Accounts …………………..
Cash realizable value …………………………..
(c)
Accounts Receivable ………………………………………………
Less: Allowance for Doubtful Accounts …………………..
Cash realizable value …………………………..
EXERCISE 7.9 (8–10 minutes)
(a)
Bad Debt Expense …………………………………………………..
4,950
Allowance for Doubtful Accounts
($80,000 X 4%) + $1,750 = $4,950 ………………….
(b)
Bad Debt Expense …………………………………………………..
Allowance for Doubtful Accounts
[($80,000 X 5%) – $1,700] …………………………..
EXERCISE 7.10 (10–12 minutes)
(a) The direct write-off approach is not theoretically justifiable even
though required for income tax purposes. The direct write-off method
does not match expenses with revenues of the period, nor does it
EXERCISE 7.11 (8–10 minutes)
Balance 1/1 ($700 – $255)
$ 445
Over one year
4/12 (#2412) ($1,710 – $1,000 – $400*)
310
Eight months and 19 days
11/18 (#5681) ($2,000 – $1,250)
750
One month and 13 days
EXERCISE 7.12 (15–20 minutes)
7/1
Accounts Receivable—Legler Co. …………………………..
9,800
Sales Revenue (€10,000 X 98%) ……………………….
9,800
7/5
Cash [€12,000 X (1 – .09)]…………………………………………
Loss on Sale of Receivables …………………………..
1,080
Accounts Receivable (€12,000 X 98%) ………………
Sales Discounts Forfeited …………………………..
EXERCISE 7.12 (Continued)
7/9
Accounts Receivable ……………………………………………….
180
Sales Discounts Forfeited
(€9,000 X 2%) ……………………………………………….
180
Cash ……………………………………………………………………….
5,640
Finance Charge (€6,000 X 6%) …………………………..
360
Notes Payable …………………………………………………
7/11
Accounts Receivable—Legler Co. …………………………..
200
Sales Discounts Forfeited
(€10,000 X 2%) …………………………..………………….
This entry may be made at the next time financial statements are
prepared. Also, it may occur on 12/29 when Legler Company’s receiv–
able is adjusted.
12/29
Allowance for Doubtful Accounts …………………………..
9,000
Accounts Receivable—Legler Co.
[€9,800 + €200 = €10,000;
€10,000 – (10% X €10,000) = €9,000] ………………
9,000
12/31
Bad Debt Expense ………………………………………………….
Allowance for Doubtful Accounts
(€350,000 – €275,000) …………………………..
EXERCISE 7.13 (10–15 minutes)
1.
7/1/19
Notes Receivable …………………………………………………….
900,000
Land ……………………………………………………….
590,000
Gain on Sale of Land
(£900,000 – £590,000) ……………..
310,000
Computation of total interest
Face value of note
Present value of 1 for 4 periods at 12%
Present value of note
Face value of note
Total interest on notes receivable
2.
7/1/19
Notes Receivable …………………………………………………….
221,163.68
Service Revenue …………………………..
221,163.68
Computation of the present value of the note:
Maturity value ……………………………………………………
£400,000.00
Present value of £400,000 due in
8 years at 12%—£400,000 X .40388 ………………….
Present value of £12,000
payable annually for 8 years at
12% annually—£12,000 X 4.96764 …………………….
Present value of the note …………………………..
EXERCISE 7.14 (20–25 minutes)
(a)
Notes Receivable ……………………………………………………
247,935
Service Revenue …………………………………………….
247,935*
(b)
Notes Receivable ……………………………………………………
24,794
Interest Revenue …………………………………………….
24,794*
*$247,935 X 10% = $24,794
(c)
Notes Receivable ……………………………………………………
Interest Revenue …………………………………………….
* ($247,935 + $24,794) x 10% = 27,273
Notes Receivable ……………………………………………
EXERCISE 7.15 (10–15 minutes)
(a)
Cash ………………………………………………………………………
290,000
Interest Expense …………………………………………………….
Notes Payable ………………………………………………..
*2% X $500,000 = $10,000
(b)
Cash ………………………………………………………………………
350,000
Accounts Receivable …………………………..
EXERCISE 7.15 (Continued)
(c)
Notes Payable ……………………………………………………….
300,000
Interest Expense …………………………………………………….
Cash ……………………………………………………….
*10% X $300,000 X 3/12 = $7,500
EXERCISE 7.16 (15–18 minutes)
1.
Cash ……………………………………………………….
18,000
Loss on Sale of Receivables
(¥20,000 X 10%) ……………………………………………………
2,000
Accounts Receivable …………………………..
20,000
2.
Cash ……………………………………………………….
50,600
Interest Expense (¥55,000 X 8%) …………………………..
4,400
Notes Payable …………………………..…………………….
55,000
3.
Bad Debt Expense …………………………………………………..
5,850
Allowance for Doubtful Accounts
[(¥82,000 X 5%) + ¥1,750] …………………………..
4.
Bad Debt Expense …………………………………………………..
Allowance for Doubtful Accounts
(¥5,800 – ¥1,100) …………………………………………..
EXERCISE 7.17 (10–15 minutes)
Cash ………………………………………………………………………
190,000
Interest Expense …………………………..…………………………
10,000
Liability to Warren Company …………………………..
200,000
LO: 5, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
EXERCISE 7.18 (15–20 minutes)
(a)
According to the IASB, determining whether receivables that are trans–
ferred can be accounted for as a sale is based on an evaluation of
(b)
The following journal entry would be made:
Cash ……………………………………………………….
235,000
Due from Factor (€250,000 X 4%) ……………………..
10,000
(€250,000 X 2%) ……………………………………………
Accounts Receivable …………………………..
EXERCISE 7.19 (10–15 minutes)
(a)
July 1
Cash ……………………………………………………….
378,000
Due from Factor ………………………………………………………
16,000*
Loss on Sale of Receivables …………………………..
**(1 1/2% X ¥400,000) = ¥6,000
(b)
July 1
Accounts Receivable …………………………..
400,000
Due to SEK Corp. …………………………..
Financing Revenue …………………………..
EXERCISE 7.20 (10–15 minutes)
(a)
Accounts Receivable ……………………………………………….
100,000
Sales Revenue ………………………………………………..
100,000
Accounts Receivable …………………………..
(b) Accounts Receivable Turnover =
Net Sales
Average Trade Receivables (net)
(c) Grant’s turnover ratio has declined significantly. That is, it is turning
EXERCISE 7.21 (10–15 minutes)
(a)
Cash [€10,000 X (1 – .09)] …………………………………………
9,100
Due from Factor ………………………………………………………
500
Loss on Sale of Receivables …………………………..
400
Accounts Receivable ………………………………………
Computation of cash received
Accounts receivable ……………………………………….
Less: Due from factor (5% X €10,000) ………………
Finance charge (4% X €10,000) ………………
Cash received …………………………………………..
(b) Accounts Receivable Turnover =
Net Sales
Average Trade Receivables (net)
Average Trade Receivables (net)
=
*EXERCISE 7.22 (5–10 minutes)
1.
April 1
Petty Cash ……………………………………………………….
Cash ……………………………………………………….
2.
April 10
Inventory (Transportation-in) …………………………..
60
Supplies Expense …………………………..
25
Postage Expense …………………………………………………….
40
Accounts Receivable—Employees …………………………..
17
Miscellaneous Expense …………………………..
36
Cash Over and Short …………………………..
10
Cash ($200 – $12) …………………………..
3.
April 20
Petty Cash ……………………………………………………….
Cash ……………………………………………………….
*EXERCISE 7.23 (10–15 minutes)
Accounts Receivable—Employees
($40.00 + $34.00) ……………………………………………………
74.00
Nick Teasdale, Drawings ………………………………………….
Maintenance and Repair Expense …………………………..
14.35
Postage Expense ($20.00 – $7.90) …………………………..
12.10
Supplies ………………………………………………………………….
Cash Over and Short ………………………………………………..
11.45
Cash ($300.00 – $10.20) …………………………………..
*EXERCISE 7.24 (15–20 minutes)
(a) KIPLING PLC
Bank Reconciliation
July 31
Balance per bank statement, July 31 ………………………..
£ 8,650
Add: Deposits in transit ………………………………………….
2,850a
Deduct: Outstanding checks …………………………..
1,100b
Correct cash balance, July 31 …………………………..
£10,400
Add: Collection of note ………………………………………….
Less: Bank service charge …………………………..
NSF check ……………………………………………………
Corrected cash balance, July 31 …………………………..
£10,400
Deposits per books
Deposits per bank in July
£ 4,500
Less deposits in transit (June)
1,540
Deposits mailed and received
in July
Deposits in transit, July 31
bComputation of outstanding checks
Checks written per books
£3,100
Checks cleared by bank in July
£ 4,000
Less outstanding checks
(June)*
2,000
Checks written and cleared
in July
Outstanding checks, July 31
*EXERCISE 7.24 (Continued)
(b)
Cash……………………………………………………………………….
1,150
Office Expense (Bank Charges) …………………………..
15
Accounts Receivable ……………………………………………….
Notes Receivable …………………………………………….
*EXERCISE 7.25 (15–20 minutes)
(a) ARAGON COMPANY
Bank Reconciliation, August 31, 2019
County National Bank
Balance per bank statement, August 31, 2019 ……………
$ 8,089
Add: Cash on hand ………………………………………………….
Balance per books, August 31, 2019
($10,050 + $35,000 – $35,403) …………………………..
$ 9,647
Add: Note ($1,000) and interest ($40) collected ………….
1,040
Deduct: Bank service charges …………………………..
Understated check for supplies …………………..
38
(b)
Notes Receivable …………………………………………….
Interest Revenue ……………………………………………..
(To record collection of note and interest)
*EXERCISE 7.25 (Continued)
Office Expense—Bank Charges …………………………..
Cash ………………………………………………………………
20
(To record August bank charges)
Supplies Expense ……………………………………………………
Cash ………………………………………………………………
18
TIME AND PURPOSE OF PROBLEMS
Problem 7.1 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of the statement of financial position effect that
Problem 7.2 (Time 20–25 minutes)
Purpose—to provide the student with the opportunity to determine various items related to accounts
receivable and the allowance for doubtful accounts. Five independent situations are provided.
Problem 7.3 (Time 20–30 minutes)
Problem 7.4 (Time 25–35 minutes)
Problem 7.5 (Time 20–30 minutes)
Problem 7.6 (Time 25–35 minutes)
Purpose—to provide the student with a number of business transactions related to accounts receivable
that must be journalized. Recoveries of receivables, and write-offs are the types of transactions
presented. The problem provides a good cross section of a number of accounting issues related to
receivables.
Problem 7.7 (Time 30–35 minutes)
Purpose—to provide the student with a simple note receivable problem with no imputation of interest.
Problem 7.8 (Time 30–35 minutes)
Problem 7.9 (Time 40–50 minutes)
Purpose—the student calculates the current portion of long-term receivables and interest receivable,
Problem 7.10 (Time 25–30 minutes)
Problem 7.11 (Time 20–25 minutes)
Time and Purpose of Problems (Continued)
*Problem 7.12 (Time 20–25 minutes)
Purpose—to provide the student the opportunity to do the accounting for petty cash and a bank
reconciliation.
SOLUTIONS TO PROBLEMS
PROBLEM 7.1
(a)
December 31
Accounts Receivable (€17,640 + €360) ………………..
18,000
Sales Revenue ………………………………………………….
28,000
Cash ……………………………………………………….
Sales Discounts …………………………..
December 31
22,200
Purchase Discounts …………………………..……………..
Accounts Payable …………………………..
(b)
Per Statement of
Financial Position
After
Adjustment
Current assets
Inventory ……………………………………………………….
€ 67,000
€ 67,000
Accounts Receivables (€42,000 +
€18,000) ……………………………………………………….
42,000
Cash (€39,000 – €45,640 + €22,200) ……………………..
Total ……………………………………….. (1)
Current liabilities
Other current liabilities ……………………
Total ………………………………………… (2)
PROBLEM 7.2
1.
Accounts receivables ……………………………………………………
$ 53,000
Percentage …………………………………………………………………..
7%
Allowance needed ………………………………………………………..
Allowance (Dr)……………..………………..…………………………….
Bad debt expense …………………………………………………………
2.
Accounts receivable …………………………………………………….
$1,750,000
Amounts estimated to be uncollectible ………………………….
(180,000)
Cash realizable value ……………………………………………………
$1,570,000
3.
Allowance for doubtful accounts 1/1/19 …………………………
$ 17,000
Collections of accounts written off in prior years ……………
8,000
Customer accounts written off in 2019 …………………………..
[$60,000 – ($17,000 + $8,000 – $30,000)] = $65,000 ………….
65,000
4.
Bad debt expense for 2019 ……………………………………………
$ 84,000
Customer accounts written off as uncollectible
during 2019 ………………………………………………………………
(24,000)
Allowance for doubtful accounts balance 12/31/19 …………
$ 60,000
Allowance for doubtful accounts balance 12/31/19 …………
60,000
5.
Accounts receivable …………………………………………………….
$ 310,000
Percentage …………………………………………………………………..
X 3%
Bad debt expense, before adjustment …………………………...
Allowance for doubtful accounts (debit balance) ……………
14,000
PROBLEM 7.3
(a) The Allowance for Doubtful Accounts should have a balance of $45,000
at year-end. The supporting calculations are shown below:
Days Account
Outstanding
Amount
Expected
Percentage
Uncollectible
Estimated
Uncollectible
0–15 days
$300,000
.02
$ 6,000
.10
80,000
.15
40,000
.20
.45
9,000
Balance for Allowance for Doubtful Accounts
$45,000
The accounts which have been outstanding over 75 days ($15,000)
and have zero probability of collection would be written off immediately
by a debit to Allowance for Doubtful Accounts for $15,000 and a credit
to Accounts Receivable for $15,000. It is not considered when deter–
mining the proper amount for the Allowance for Doubtful Accounts.
(c) The year-end bad debt adjustment would decrease before-tax income
$20,000 as computed below: