TIME AND PURPOSE OF PROBLEMS
Problem 7-1 (Time 20–25 minutes)
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)
Purpose—the student prepares an analysis of the changes in the allowance for doubtful accounts and
supports it with an aging schedule.
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 notes and accounts
Problem 7-7 (Time 25–30 minutes)
Problem 7-8 (Time 30–35 minutes)
Purpose—to provide the student with a simple note receivable problem with no imputation of interest.
Problem 7-9 (Time 30–35 minutes)
Problem 7-10 (Time 40–50 minutes)
Purpose—the student calculates the current portion of long-term receivables and interest receivable,
Problem 7-11 (Time 20–25 minutes)
Purpose—to provide the student the opportunity to record the sales of receivables with and without
recourse and to determine the income effects.
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.
*Problem 7-13 (Time 20–30 minutes)
Purpose—to provide the student with the opportunity to prepare a bank reconciliation which is reconciled
to a corrected balance. Traditional types of adjustments are presented. Journal entries are also required.
SOLUTIONS TO PROBLEMS
PROBLEM 7-1
(a)
December 31
Accounts Receivable ($17,640 + $360) ……………….
18,000
Sales Revenue ………………………………………………….
28,000
Cash ……………………………………………………….
45,640
Sales Discounts ………………………………………..
December 31
Cash ……………………………………………………….
22,200
Purchase Discounts ………………………………………….
Accounts Payable …………………………..
22,450
(b)
Per Balance
Sheet
After
Adjustment
Current assets
Cash ($39,000 – $45,640 + $22,200) ……………………..
$ 39,000
$ 15,560
Inventory ……………………………………………………….
67,000
67,000
Total ………………………………………… (1)
Current liabilities
Accounts payable
Other current liabilities …………………..
14,200
Total ………………………………………… (2)
81,650
Accounts Receivable
PROBLEM 7-2
1.
Net sales ……………………………………………………………………..
$1,200,000
Percentage …………………………………………………………………..
1 1/2%
Bad debt expense ………………………………………………………..
2.
Accounts receivable …………………………………………………….
$1,750,000
Amounts estimated to be uncollectible ………………………….
(180,000)
Net realizable value ………………………………………………………
$1,570,000
3.
Allowance for doubtful accounts 1/1/14 …………………………
$ 17,000
Establishment of accounts written off in prior years ………
8,000
Customer accounts written off in 2014 …………………………..
Bad debt expense for 2014 ($2,400,000 X 3%) ………………..
72,000
Allowance for doubtful accounts 12/31/14 ……………………..
4.
Bad debt expense for 2014 ……………………………………………
$ 84,000
Customer accounts written off as uncollectible
during 2014 ………………………………………………………………
(24,000)
Allowance for doubtful accounts balance 12/31/14 …………
Accounts receivable, net of allowance
for doubtful Accounts ……………………………………………….
Allowance for doubtful accounts balance 12/31/14 …………
60,000
5.
Accounts receivable …………………………………………………….
$ 310,000
Percentage …………………………………………………………………..
3%
Bad debt expense, before adjustment …………………………...
Allowance for doubtful accounts (debit balance) ……………
Bad debt expense, as adjusted ……………………………………..
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
16–30 days
100,000
.10
10,000
80,000
.15
46–60 days
.20
61–75 days
.45
(b)
Accounts receivable ($555,000 – $15,000) ……………………
$540,000
Less: Allowance for doubtful accounts ………………………
45,000
Accounts receivable (net) …………………………………………..
$495,000
(c) The year-end bad debt adjustment would decrease before-tax income
$20,000 as computed below:
PROBLEM 7-4
(a) FORTNER CORPORATION
Analysis of Changes in the
Allowance for Doubtful Accounts
For the Year Ended December 31, 2014
Balance at January 1, 2014 ………………………………………..
$130,000
Provision for doubtful accounts ($9,000,000 X 2%) ……..
180,000
Schedule 1
Computation of Allowance for Doubtful Accounts
at December 31, 2014
Aging
Category
Balance
%
Doubtful
Accounts
Nov.–Dec. 2014
$1,080,000
2
$ 21,600
650,000
65,000
420,000
90,000(a)
(a) $150,000 – $60,000
(b) The journal entry to record this transaction is as follows:
$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 ………………………………………..
Unearned Sales Revenue ………………………….
Allowance for Doubtful Accounts ………………………
Accounts Receivable ………………………………..
3,700
(To write off $3,700 of uncollectible
accounts)
(Note to instructor: Many students will not make this entry at this point.
Because $3,700 is totally uncollectible, a write-off immediately seems most
appropriate. The remainder of the solution therefore assumes that the student
made this entry.)
Allowance for Doubtful Accounts ………………………
Bad Debt Expense ……………………………………
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
36,684 ($39,924 – $3,240)
6%
Over 120 days
19,944 ($23,644 – $3,700)
4,986.00
PROBLEM 7-5 (Continued)
If the student did not make the entry to record the $3,700 write-off earlier, the
following would change in the problem. After the adjusting entry for $7,279.64,
an entry would have to be made to write off the $3,700.
Age
Balance
Aging
Schedule
Under 60 days
$172,342
1%
$ 1,723.42
36,684
6%
–1–
Cash ………………………………………………………………..
136,800*
Sales Discounts ………………………………………………..
Accounts Receivable ………………………………..
*[$138,000 – ($60,000 X 2%)]
–2–
Accounts Receivable ………………………………………..
5,300
Allowance for Doubtful Accounts ………………
Cash ………………………………………………………………..
5,300
Accounts Receivable ………………………………..
5,300
–3–
Allowance for Doubtful Accounts ………………………
Accounts Receivable ………………………………..
Bad Debt Expense …………………………………………….
PROBLEM 7-7
July 1, 2014
Cash ……………………………………………………………………….
119,250
Interest Expense (.005 X $150,000) …………………………...
750
Notes Payable (80% X $150,000) ……………………….
120,000
Notes Payable …………………………..……………………………..
Accounts Receivable ……………………………………….
Interest Expense ………………………………………………………
Interest Payable (.005 X $70,000) ………………………
August 31, 2014
Notes Payable …………………………..……………………………..
40,000
Cash* …………………………..………………………………………….
Interest Expense (.005 X [$150,000 –
$80,000 – $50,000]) ………………………………………………..
Interest Payable ……………………………………………………….
Accounts Receivable ……………………………………….
*Total cash collection ……………………………………………….
$50,000
Less: Interest payable (from previous entry) …………….
(350)
Interest expense (current month) [(.005 X
$150,000 – $80,000 – $50,000)] ………………………
(100)
Notes payable (balance) ($120,000 – $80,000) …..
PROBLEM 7-8
10/1/14
Notes Receivable ……………………………………………………
120,000
Sales Revenue …………………………..
120,000
12/31/14
Interest Receivable …………………………..
Interest Revenue …………………………..
2,400
*$120,000 X .08 X 3/12 = $2,400
Cash ……………………………………………………….
Interest Receivable …………………………..
2,400
Interest Revenue …………………………..
*$120,000 X .08 = $9,600
**$120,000 X .08 X 9/12 = $7,200
12/31/15
Interest Receivable …………………………..
2,400
Interest Revenue ………………………….
2,400
10/1/16
Cash ……………………………………………………….
9,600
Interest Revenue …………………………
Cash ……………………………………………………….
120,000
Notes Receivable …………………………..
PROBLEM 7-9
(a)
December 31, 2014
Cash……………………………………………………………….
40,000
Notes Receivable …………………………………………….
80,000
Discount on Notes Receivable …………………
17,951
Service Revenue ……………………………………..
102,049
Down payment ……………………………..
(b)
December 31, 2015
Cash………………………………………………………………….
20,000
Notes Receivable ……………………………………….
20,000
Discount on Notes Receivable …………………………...
6,825
Interest Revenue ………………………………………..
Schedule of Note Discount Amortization
Date
Cash
Received
Interest
Revenue
Carrying
Amount of Note
12/31/14
—
—
$62,049
12/31/16
PROBLEM 7-9 (Continued)
(c)
December 31, 2016
Cash …………………………………………………………………
20,000
Notes Receivable ……………………………………….
20,000
Discount on Notes Receivable …………………………...
Interest Revenue ……………………………………….
(d)
December 31, 2017
Cash …………………………………………………………………
20,000
Notes Receivable ……………………………………….
20,000
Discount on Notes Receivable …………………………...
Interest Revenue ……………………………………….
(e)
Cash …………………………………………………………………
20,000
Notes Receivable ……………………………………….
20,000
Discount on Notes Receivable …………………………...
Interest Revenue ……………………………………….
PROBLEM 7-10
(a) BRADDOCK INC.
Long-Term Receivables Section of Balance Sheet
December 31, 2014
9% note receivable from sale of division, due
in annual installments of $500,000 to
May 1, 2016, less current installment ……………..
$ 500,000
(1)
8% note receivable from officer, due Dec. 31,
2016, 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, 2016 …………………………………………………
(2)
Installment contract receivable, due in annual
installments of $45,125 to July 1, 2018,
less current installment ………………………………..
110,275
(3)
Total long-term receivables ………………………..
$1,097,148
(b) BRADDOCK INC.
Selected Balance Sheet Balances
December 31, 2014
Current portion of long-term receivables:
Note receivable from sale of division ………………………..
$500,000
(1)
Installment contract receivable …………………………..
29,725
(3)
Accrued interest receivable:
Note receivable from sale of division ………………………..
(4)
Installment contract receivable …………………………..
Total accrued interest receivable …………………………
$ 67,700
PROBLEM 7-10 (Continued)
(c) BRADDOCK INC.
Interest Revenue from Long-Term Receivables
For the Year Ended December 31, 2014
Interest revenue:
Note receivable from sale of division …………………………
$105,000
(6)
Note receivable from sale of patent …………………………..
(2)
Note receivable from officer ………………………………………
(7)
Installment contract receivable from sale of land ………..
7,700
(5)
Total interest revenue for year ended 12/31/14 ………
$151,873
Explanation of Amounts
(1)
Long-term Portion of 9% Note Receivable at 12/31/14
Face amount, 5/1/13 ………………………………………..
$1,500,000
Less: Installment received 5/1/14 …………………….
500,000
Balance, 12/31/14 …………………………………………….
Less: Installment due 5/1/15 …………………………..
500,000
Long-term portion, 12/31/14 ……………………………..
$ 500,000
(2)
Zero-interest-bearing Note, Net of Imputed Interest
at 12/31/14
Face amount 4/1/14 …………………………………………
$ 100,000
Less: Imputed interest
[$100,000 – ($100,000 X 0.797)] ………………
20,300
Balance, 4/1/14 ………………………………………………..
Add: Interest earned to 12/31/14
($79,700 X 12% X 9/12) …………………………..
7,173
Balance, 12/31/14 …………………………………………….
PROBLEM 7-10 (Continued)
(3)
Long-term Portion of Installment Contract
Receivable at 12/31/14
Contract selling price, 7/1/14…………………………...
Less: Down payment, 7/1/14 …………………………..
Balance, 12/31/14 ……………………………………………
Less: Installment due, 7/1/15
[$45,125 – ($140,000 X 11%)]………………….
Long-term portion, 12/31/14 …………………………….
(4)
Accrued Interest—Note Receivable, Sale of
Division at 12/31/14
Interest accrued from 5/1 to 12/31/14
($1,000,000 X 9% X 8/12) ……………………………….
$ 60,000
(5)
Accrued Interest—Installment Contract at 12/31/14
Interest accrued from 7/1 to 12/31/14
($140,000 X 11% X 1/2) ………………………………….
$ 7,700
(6)
Interest Revenue—Note Receivable, Sale of
Division, for 2014
Interest earned from 1/1 to 5/1/14
($1,500,000 X 9% X 4/12) ……………………………….
Interest earned from 5/1 to 12/31/14
($1,000,000 X 9% X 8/12) ……………………………….
Interest income ………………………………………………
$ 105,000
(7)
Interest Revenue—Note Receivable, Officer, for 2014
Interest earned 1/1 to 12/31/14
($400,000 X 8%) ……………………………………………
$ 32,000
PROBLEM 7-11
SANDBURG COMPANY
Income Statement Effects
For the Year Ended December 31, 2014
Expenses resulting from accounts receivable
Schedule 1
Computation of Expense
for Accounts Receivable Assigned
Assignment expense:
Accounts receivable assigned …………………………..
$400,000
X 80%
Advance by Keller Finance Company …………………..
X 3%
Interest expense ……………………………………………………….
*PROBLEM 7-12
(a)
Petty Cash ……………………………………………………….
250.00
Cash …………………………..……………………………..
250.00
Postage Expense ……………………………………………….
33.00
Supplies …………………………………………………………….
65.00
Accounts Receivable (Employees) ………………………
30.00
Freight-Out ……………………………………………………….
57.45
Advertising Expense …………………………………………..
22.80
Miscellaneous Expense ………………………………………
15.35
Petty Cash ……………………………………………………….
50.00
Cash …………………………..……………………………..
50.00
(b)
Balances per bank: …………………………………………….
$6,522
Add:
Cash on hand …………………………………………….
$ 246
Deposit in transit ………………………………………..
3,000
3,246
9,768
Balance per books: …………………………………………….
$8,015*
Add: Note receivable (collected with interest) ……..
930
8,945
Deduct: Bank service charges …………………………..
27
*($8,850 + $31,000 – $31,835)
Cash ………………………………………………………………….
Notes Receivable ……………………………………….
Interest Revenue …………………………..……………
Office Expense (bank charges) …………………………..
Cash …………………………..……………………………..
(c) $8,918 + $300 = $9,218.
*PROBLEM 7-13
(a) AGUILAR CO.
Bank Reconciliation
June 30, 2014
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) ……………….
$ 30.00
Error on check no. 747
($582.00 – $58.20) …………………………………………
523.80
Note collection ($1,200 + $36) …………………………..
1,236.00
5,759.65
Deduct: NSF check …………………………………………………..
253.20
Error on check no. 742 ($491 – $419)…………
72.00
Bank service charges ($25 + $5.50) ………………
30.50
(355.70)
Correct cash balance, June 30 …………………………..………
$5,403.95
(b) Cash ………………………………………………………………
1,789.80
Accounts Receivable …………………………………
30.00*
Accounts Payable………………………………………
Notes Receivable ……………………………………….
1,200.00
Interest Revenue ……………………………………….
Accounts Receivable ………………………………………
Accounts Payable …………………………………………..
Office Expense (bank charges) ………………………..
Cash ……………………………………………………….
*Assumes sale was on account and not a cash sale.
**Assumes that the purchase of the equipment was recorded at its
*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 ………………….
$ 27.40
Customer’s check returned NSF …………………………
372.13
399.53
*Computation of balance per books,
November 30