Chapter Eight
Challenge Exercise 1
Presented below are selected transactions of Heinrich Company. Heinrich sells in large quantities to other
companies and also sells its product in a small retail outlet.
March 1 Sold merchandise on account to Kirk Company for $4,000, terms 2/10, n/30.
3 Kirk Company returned merchandise worth $600 to Heinrich.
9 Heinrich collected the amount due from Kirk Company from the March 1 sale.
15 Heinrich sold merchandise for $8,000 in its retail outlet. The customers used their Heinrich credit
card.
31 Heinrich added 1.5% monthly interest to the customers’ credit card balance.
April 10 Heinrich collected $3,050 from credit card customers.
Instructions:
a) Prepare journal entries for the transactions above.
b) What is the balance from credit card transactions in Accounts Receivable after the April 10 transaction?
Challenge Exercise 1 – Solution
a)
March 1 Accounts Receivable—Kirk Company …………………………... 4,000
Sales Revenue ………………………………………………….. 4,000
15 Accounts Receivable ………………………………………………….. 8,000
Sales Revenue ………………………………………………….. 8,000
Challenge Exercise 2
The ledger of Ruru Company at the end of the current year shows Accounts Receivable $200,000, Sales
$1,400,000, and Sales Returns and Allowances $50,000.
Instructions:
(a) If Ruru uses the direct write-off method to account for uncollectible accounts, journalize the adjusting entry
at
December 31, assuming Ruru determines that Barking Ghosts Company’s $2,400 balance is uncollectible.
(b) If Allowance for Doubtful Accounts has a credit balance of $3,500 in the trial balance, journalize the
adjusting entry
at December 31, assuming bad debts are expected to be (1) 1% of net sales, and (2) 10% of accounts
receivable.
(c) If Allowance for Doubtful Accounts has a debit balance of $370 in the trial balance, journalize the adjusting
entry at
December 31, assuming bad debts are expected to be (1) 0.75% of net sales and (2) 6% of accounts
receivable.
(d) Why is the allowance method required by GAAP?
Challenge Exercise 2 – Solution
(a) Dec. 31 Bad Debt Expense ………………………………………. 2,400
Accounts Receivable—Barking Ghosts ……… 2,400
(2) Dec. 31 Bad Debt Expense ………………………………………. 16,500
Allowance for Doubtful
(2) Dec. 31 Bad Debt Expense ………………………………………. 12,370
Allowance for Doubtful
Challenge Exercise 3
Wilder Company has accounts receivable of $130,000 at March 31. An analysis of the accounts shows the
following.
Month of Sale Balance, March 31
March $80,000
February 27,600
January 14,500
Prior to January 7,900
$130,000
Credit terms are 2/10, n/30. At March 31, Allowance for Doubtful Accounts has a credit balance of $1,700 prior
to adjustment. The company uses the percentage–of-receivables basis for estimating uncollectible accounts.
Wilder estimates that 8% of accounts receivable will become uncollectible. The company is considering using
the estimate of bad debts shown below.
Estimated Percentage
Age of Accounts Uncollectible
1–30 days 2.0%
31–60 days 5.0%
61–90 days 30.0%
Over 90 days 50.0%
Instructions:
(a) Prepare the adjusting entry at March 31 to record bad debt expense, assuming that the 8% estimate is
used.
(b) Prepare the adjusting entry at March 31 to record bad debt expense, assuming the aging schedule is used.
(c) Compare the two approaches used above.
Challenge Exercise 3 – Solution
(a) Mar. 31 Bad Debt Expense ……………………………………………………… 8,700
(b)
Accounts Receivable
Amount
%
1–30 days
31–60 days
$80,000
27,600
2.0
5.0
(c) The two approaches are conceptually the same. In both cases, Wilder estimates the total uncollectibles
based on the
balance in Accounts Receivable. This amount is compared to the existing balance to compute the bad debt
Challenge Exercise 4
At December 31, 2013, Dallas Company had a balance of $25,000 in the Allowance for Doubtful Accounts.
During 2014, Braddock wrote off accounts totaling $22,200. One of those accounts ($3,000) was later
collected. At December 31, 2014, an aging schedule indicated that the balance in the Allowance for Doubtful
Accounts should be $32,000.
Instructions:
(a) Prepare journal entries to record the 2014 transactions of Dallas Company.
(b) Indicate the effect (increase, decrease, or no effect) that each of the four transactions has on Dallas
Company’s
assets, liabilities, stockholders’ equity, and net income.
Challenge Exercise 4 – Solution
(a)
1. Allowance for Doubtful Accounts …………………………………………………….. 22,200
Accounts Receivable ……………………………………………………………….. 22,200
4. Bad Debt Expense ………………………………………………………………………… 26,200
(b) Assets Liabilities Stockholders’ Equity Net Income
2. NE NE NE NE
4. D NE D D
Challenge Exercise 5
Ordonez Supply Co. has the following transactions related to notes receivable during the last 2 months of
2014.
Nov. 1 Loaned $20,000 cash to Soozie Takham on a 1-year, 10% note.
Dec. 11 Sold goods to Joe Trater, Inc., receiving a $9,000, 90-day, 8% note.
16 Received a $6,000, 6-month, 9% note in exchange for Boba Fett’s outstanding accounts receivable.
31 Accrued interest revenue on all notes receivable.
Instructions:
(a) Journalize the above transactions for Ordonez Supply Co. Round interest to the nearest dollar.
(b) Record the collection of the Takham note at its maturity in 2015.
(c) Assume Takham dishonors its note at its maturity in 2015; Ordonez expects to eventually collect the note.
Record the dishonor of the Takham note.
(d) Assume Takham dishonors its note at its maturity in 2015; Ordonez does not expect to collect the note.
Record the dishonor of the Takham note.
Challenge Exercise 5 – Solution
(a) 2014
Nov. 1 Notes Receivable ………………………………………………………….. 20,000
Cash …………………………………………………………………… 20,000
*Calculation of interest revenue:
Takham’s note: $20,000 X 10% X 2/12 = $333
Challenge Exercise 5 – Solution (Continued)
(b) 2015
Nov. 1 Cash …………………………………………………………………………… 22,000
Interest Receivable ………………………………………………. 333
(c) 2015
Nov. 1 Accounts Receivable …………………………………………………….. 22,000
Interest Receivable ………………………………………………. 333
(d) 2015
Nov. 1 Allowance for Doubtful Accounts ……………………………………. 20,333