PROBLEM 7.4
(a) FORTNER PLC
Analysis of Changes in the
Allowance for Doubtful Accounts
For the Year Ended December 31, 2019
Balance at January 1, 2019 ………………………………………..
£130,000
Provision for doubtful accounts (£9,000,000 X 2%) ……..
180,000
Recovery in 2019 of bad debts written off previously ….
15,000
325,000
in accounting estimate …………………………………………..
during 2019 (£263,600 – £175,000) ………………………….
88,600
Schedule 1
Computation of Allowance for Doubtful Accounts
at December 31, 2019
Balance
%
Doubtful
Accounts
£1,080,000
2
£ 21,600
650,000
65,000
420,000
90,000(a)
72,000
PROBLEM 7.4 (Continued)
(b) The journal entry to record this transaction is as follows:
Bad Debt Expense …………………………………..
88,600
PROBLEM 7.5
Bad Debt Expense …………………………………………….
3,240
Accounts Receivable ………………………………..
3,240
(To correct bad debt expense and
write off accounts receivable)
Accounts Receivable ………………………………………..
4,840
Advance on Sales Contract ……………………….
4,840
Allowance for Doubtful Accounts ………………………
3,700
Accounts Receivable ………………………………..
3,700
(To write off €3,700 of uncollectible
accounts)
Allowance for Doubtful Accounts ………………………
7,279.64
Bad Debt Expense …………………………………….
7,279.64
(To reduce allowance for doubtful
account balance)
Balance (€8,750 + €18,620 – €3,240 – €3,700) ………
Corrected balance (see below) …………………………..
Age
Balance
Aging
Schedule
Under 60 days
€172,342
1%
€ 1,723.42
3%
36,684 (€39,924 – €3,240)
6%
Over 120 days
19,944 (€23,644 – €3,700)
PROBLEM 7.5 (Continued)
If the student did not make the entry to record the €3,700 write-off earlier,
Balance (€8,750 + €18,620 – €3,240)…………….
Corrected balance (see below) ……………………
Age
Balance
Aging
Schedule
Under 60 days
€172,342
1%
€ 1,723.42
3%
6%
Over 120 days
PROBLEM 7.6
–1–
Cash…………………………………………………………………
136,800*
Sales Discounts ………………………………………………..
1,200
Accounts Receivable ………………………………..
138,000
–2–
Accounts Receivable …………………………………………
5,300
Allowance for Doubtful Accounts ………………
Cash…………………………………………………………………
5,300
Accounts Receivable ………………………………..
–3–
Allowance for Doubtful Accounts ………………………
17,500
Accounts Receivable ………………………………..
–4–
Bad Debt Expense …………………………………………….
14,900
Allowance for Doubtful Accounts ………………
R$20,000 – R$5,100 = R$14,900)
PROBLEM 7.7
10/1/19
Notes Receivable ……………………………………………………
120,000
Sales Revenue …………………………..
120,000
12/31/19
Interest Receivable …………………………..
Interest Revenue …………………………..
2,400
*$120,000 X .08 X 3/12 = $2,400
10/1/20
Cash ……………………………………………………….
Interest Receivable …………………………..
2,400
Interest Revenue …………………………..
**$120,000 X .08 X 9/12 = $7,200
12/31/20
Interest Receivable …………………………..
2,400
Interest Revenue ………………………….
2,400
10/1/21
Cash ……………………………………………………….
9,600
Interest Receivable …………………………..
2,400
Interest Revenue …………………………
7,200
Cash ……………………………………………………….
120,000
Notes Receivable …………………………..
120,000
PROBLEM 7.8
(a)
December 31, 2019
Cash……………………………………………………………….
40,000
Notes Receivable …………………………………………….
62,049
Service Revenue …………………………..…………
102,049
Down payment ……………………………..
(b)
December 31, 2020
Cash………………………………………………………………….
20,000
Notes Receivable ……………………………………….
20,000
Notes Receivable ……………………………………………….
6,825
Interest Revenue ………………………………………..
6,825
Schedule of Note Discount Amortization
Date
Cash
Received
Interest
Revenue
Carrying Amount
of Note
12/31/19
—
—
£62,049
£20,000
PROBLEM 7.8 (Continued)
(c)
December 31, 2021
Cash …………………………………………………..
20,000
Notes Receivable …………………………
20,000
Notes Receivable …………………………………
Interest Revenue …………………………
(d)
December 31, 2022
Cash …………………………………………………..
20,000
Notes Receivable …………………………
20,000
Notes Receivable …………………………………
Interest Revenue …………………………
(e)
December 31, 2023
Cash …………………………………………………..
20,000
Notes Receivable …………………………
20,000
Notes Receivable …………………………………
Interest Revenue …………………………
PROBLEM 7.9
(a) BRADDOCK INC.
Long-Term Receivables Section of Statement of Financial Position
December 31, 2019
9% note receivable from sale of division, due
in annual installments of $500,000 to
May 1, 2021, less current installment ……………..
$ 500,000
(1)
8% note receivable from officer, due Dec. 31,
2021, collateralized by 10,000 shares
of Braddock, Inc., common stock
with a fair value of $450,000…………………………..
Zero-interest-bearing note from sale of patent,
net of 12% imputed interest, due April 1,
2021 …………………………………………………………….
(2)
Installment contract receivable, due in annual
installments of $45,125 to July 1, 2023,
less current installment ………………………………..
110,275
(3)
Total long-term receivables ………………………..
$1,097,148
(b) BRADDOCK INC.
Partial Statement of Financial Position Balances
December 31, 2019
Current portion of long-term receivables:
Note receivable from sale of division …………………………
$500,000
(1)
receivables ……………………………………………………..
Accrued interest receivable:
Note receivable from sale of division …………………………
(4)
Installment contract receivable …………………………..
(5)
PROBLEM 7.9 (Continued)
(c) BRADDOCK INC.
Interest Revenue from Long-Term Receivables
For the Year Ended December 31, 2019
Interest income:
Note receivable from sale of division …………………………
$105,000
(6)
Note receivable from sale of patent …………………………..
(2)
Installment contract receivable from sale of land ……….
7,700
(5)
Total interest income for year ended 12/31/19 ……….
$151,873
Explanation of Amounts
(1)
Long-term Portion of 9% Note Receivable at 12/31/19
Face amount, 5/1/18 ………………………………………..
$1,500,000
Less: Installment received 5/1/19 …………………….
500,000
Balance, 12/31/19 ……………………………………………
Less: Installment due 5/1/20 …………………………...
500,000
Long-term portion, 12/31/19 …………………………….
$ 500,000
(2)
Zero-interest-bearing Note, Net of Imputed Interest
at 12/31/19
Face amount 4/1/19 …………………………………………
$ 100,000
Less: Imputed interest
[$100,000 – ($100,000 X 0.797)] ………………
20,300
Balance, 4/1/18 ……………………………………………….
Add: Interest earned to 12/31/19
($79,700 X 12% X 9/12) …………………………..
7,173
PROBLEM 7.9 (Continued)
(3)
Long-term Portion of Installment Contract
Receivable at 12/31/19
Contract selling price, 7/1/19 …………………………...
Less: Down payment, 7/1/19 …………………………...
Balance, 12/31/19 …………………………..………………..
Less: Installment due, 7/1/20
[$45,125 – ($140,000 X 11%)] ………………….
(4)
Accrued Interest—Note Receivable, Sale of
Division at 12/31/19
Interest accrued from 5/1 to 12/31/19
(5)
Accrued Interest—Installment Contract at 12/31/19
Interest accrued from 7/1 to 12/31/19
($140,000 X 11% X 1/2) ………………………………….
$ 7,700
(6)
Interest Revenue—Note Receivable, Sale of
Division, for 2019
Interest earned from 1/1 to 5/1/2019
($1,500,000 X 9% X 4/12) ……………………………….
Interest earned from 5/1 to 12/31/19
($1,000,000 X 9% X 8/12) ……………………………….
(7)
Interest Revenue—Note Receivable, Officer, for 2019
Interest earned 1/1/ to 12/31/19
PROBLEM 7.10
(000’s omitted)
July 1, 2019
Cash ……………………………………………………………………….
119,250
Finance Charge (.005 X ¥150,000) ……………………………..
750
Notes Payable (80% X ¥150,000) ……………………….
120,000
Notes Payable ………………………………………………………….
Accounts Receivable ……………………………………….
80,000
Finance Charge ……………………………………………………….
350
Finance Charge Payable (.005 X ¥70,000) ………….
August 31, 2019
Notes Payable ………………………………………………………….
40,000
Cash* ………………………………………………………………………
9,550
Finance Charge (.005 X [¥150,000 –
¥80,000 – ¥50,000]) ………………………………………………..
100
Finance Charge Payable …………………………..………………
350
Accounts Receivable ……………………………………….
50,000
*Total cash collection …………………………..…………………
Less: Finance charge payable (from previous entry) …
350
Finance charge (current month) [(.005 X
(¥150,000 – ¥80,000 – ¥50,000)] ……………………..
100
Note payable (balance) (¥120,000 – ¥80,000)…….
PROBLEM 7.11
SANDBURG COMPANY
Income Statement Effects
For the Year Ended December 31, 2019
Expenses resulting from accounts receivable
assigned (Schedule 1) …………………………………………..
€22,320
Total expenses …………………………..………………………
€52,320
Schedule 1
Computation of Expense
for Accounts Receivable Assigned
Assignment expense:
Accounts receivable assigned …………………………..
€400,000
Advance by Keller Finance Company …………………..
Interest expense ………………………………………………………
Total expenses …………………………………………………..
€22,320
*PROBLEM 7.12
(a)
Petty Cash ……………………………………………………….
250.00
Cash ………………………………………………………….
250.00
Postage Expense ……………………………………………….
33.00
Supplies …………………………………………………………….
65.00
Accounts Receivable—Employees ………………………
30.00
Shipping Expense …………………………..………………….
57.45
Advertising Expense ………………………………………….
22.80
Miscellaneous Expense ………………………………………
15.35
Cash (£250.00 – £26.40) ………………………………
223.60
Petty Cash ……………………………………………………….
50.00
Cash ………………………………………………………….
(b)
Balance per bank: ………………………………………………
£6,522
Add:
Cash on hand …………………………………………….
£ 246
Deposit in transit ……………………………………….
3,000
3,246
Deduct: Checks outstanding……………………………….
850
Balance per books: …………………………………………….
Add: Note receivable (collected with interest) ……..
930
Deduct: Bank Service Charges …………………………..
27
*(£8,850 + £31,000 – £31,835)
Cash …………………………..……………………………………..
Notes Receivable ……………………………………….
Interest Revenue ………………………………………..
Office Expense (Bank Charges) …………………………..
Cash ………………………………………………………….
*PROBLEM 7.13
(a) AGUILAR CO.
Bank Reconciliation
June 30, 2019
Balance per bank, June 30 ………………………………………..
$4,150.00
Add: Deposits in transit …………………………………………..
3,390.00
Deduct: Outstanding checks …………………………..
2,136.05
Correct cash balance, June 30 …………………………..
$5,403.95
Balance per books, June 30 …………………………..
$3,969.85
Add: Error in recording deposit ($90 – $60) ………………
Error on check no. 747
($582.00 – $58.20) …………………………………………
523.80
Note collection ($1,200 + $36) ………………………….
Deduct: NSF check ………………………………………………….
253.20
Error on check no. 742 ($491 – $419) …
Bank service charges ($25 + $5.50) ………………
Correct cash balance, June 30 …………………………..
$5,403.95
(b) Cash ………………………………………………………………
1,789.80
Accounts Receivable ………………………………….
30.00*
Accounts Payable ………………………………………
523.80**
Notes Receivable ……………………………………….
1,200.00
Interest Revenue ………………………………………..
36.00
Accounts Receivable ………………………………………
253.20
Accounts Payable …………………………………………..
Office Expense (Bank Charges) ……………………….
Cash ……………………………………………………….
*PROBLEM 7.14
(a) HASELHOF INC.
Bank Reconciliation
November 30
Balance per bank statement, November 30 ………………
$56,274.20
Add:
Cash on hand, not deposited …………………………..
1,915.40
58,189.60
Deduct:
Outstanding checks
#1224 ……………………………………………………….
#1230 ……………………………………………………….
#1232 ……………………………………………………….
#1233 ……………………………………………………….
6,710.91
Balance per books, November 30 …………………………..
$50,478.22*
Add:
Bond interest collected by bank …………………………
1,400.00
51,878.22
Deduct:
Bank charges not recorded in books ………………….
Customer’s check returned NSF …………………………
399.53
*PROBLEM 7.14 (Continued)
(b)
November 30
Cash…………………………………………………………
1,400.00
Interest Revenue ……………………………….
1,400.00
November 30
Office Expense (Bank Charges) …………………
Cash ………………………………………………..
November 30
Accounts Receivable …………………………………
Cash ………………………………………………..
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 7.1 (Time 10–15 minutes)
CA 7.2 (Time 15–20 minutes)
Purpose—to provide the student with the opportunity to discuss the accounting for cash discounts,
trade discounts, and the factoring of accounts receivable.
CA 7.3 (Time 25–30 minutes)
Purpose—to provide the student with the opportunity to discuss the advantages and disadvantages of
CA 7.4 (Time 25–30 minutes)
Purpose—to provide the student the opportunity to discuss when interest revenue from a note receivable
CA 7.5 (Time 25–30 minutes)
CA 7.6 (Time 20–25 minutes)
Purpose—to provide the student with a discussion problem related to notes receivable sold without and
with recourse.
CA 7.7 (Time 20–30 minutes)
CA 7.8 (Time 25–30 minutes)
Purpose—to provide the student the opportunity to calculate interest revenue on an interest-bearing
CA 7.9 (Time 25–30 minutes)
Purpose—to provide the student with a case related to the imputation of interest. One company has
CA 7.10 (Time 25–30 minutes)
Purpose—to provide the student with a case to analyze receivables irregularities, including a shortage.
This is a good writing assignment.
CA 7.11 (Time 25–30 minutes)
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 7.1
(a) The direct write-off method overstates the trade accounts receivable on the statement of financial
position by reporting them at more than their cash realizable value. Furthermore, because the
write-off often occurs in a period after the revenues were generated, the direct write-off method
does not match bad debts expense with the revenues generated by sales in the same period.
CA 7.2
(a) (1) Kimmel should account for the sales discounts at the date of sale using the net method by
recording accounts receivable and sales revenue at the amount of sales less the sales
discounts available.
(b) Trade discounts are neither recorded in the accounts nor reported in the financial statements.
Therefore, the amount recorded as sales revenues and accounts receivable is net of trade
discounts and represents the cash-equivalent price of the asset sold.
(c) To account for the accounts receivable factored on August 1, 2019, Kimmel should decrease