CHAPTER 7
SOLUTIONS TO B EXERCISES
E7-1B (10–15 minutes)
(a) Cash includes the following:
1.
Commercial savings account—
First National Bank of Yojimbo ………………………..
$ 1,200,000
Money market fund—Nguyen Co. ………………………
(b) Other items classified as follows:
3. Travel advances (reimbursed by employee)* should be reported as
receivable—employee in the amount of $360,000.
4. Cash restricted in the amount of $3,000,000 for the retirement of
liability.**
8. Certificates of deposits of $1,000,000 each should be classified as
temporary investments.
9. Postdated check of $250,000 should be reported as an accounts
receivable.
10. The compensating balance requirement does not affect the balance
E7-2B (10–15 minutes)
1. Cash balance of $323,000 consisting of the checking account balance and
the savings account. Only the checking account balance should be
2. Cash balance is $116,300 computed as follows:
Overdraft …………………………………………………..
3. Cash balance of $205,000. Only the checking account balance should be
reported as cash.
The postdated check of $10,000 should be reported as a receivable.
reported as a receivable;
4. Cash balance is $336,000 computed as follows:
Checking account balance ………………………….
$ 61,000
E7-2B (Continued)
5. Cash balance is $171,900 computed as follows:
$171,000
900
E7-3B (10–15 minutes)
Current assets
Accounts receivable
Customers
for a bank loan) …………………………..
Installment accounts due in 2015 ……
December 31, 2015* …………………….
Other** ($10,320 + $4,200) …………………
Investments
Advance to subsidiary company ………….
Accounts (of which accounts
in the amount of $40,000 have
E7-4B (10–15 minutes)
Computation of cost of goods sold:
Merchandise purchased ………………………………………..
Less: Ending inventory …………………………………………
Sales on account
$345,000
Less collections
203,000
Uncollected balance
Balance per ledger
87,000
E7-5B (15–20 minutes)
(a)
1.
June 3
Accounts Receivable—Pham Inc. …………………………...
1,500
Sales ……………………………………………………………..
1,500
June 12
Cash ………………………………………………………………………
1,470
Sales Discounts ($1,500 X 2%) …………………………………
Accounts Receivable—Pham …………………………..
1,500
June 3
Accounts Receivable—Pham …………………………………..
1,470
Sales ($1,500 X 98%) ……………………………………….
1,470
June 12
Cash ………………………………………………………………………
1,470
Accounts Receivable—Pham …………………………..
1,470
(b)
July 29
Cash ………………………………………………………………………
1,500
Accounts Receivable—Pham …………………………..
1,470
Sales Discounts Forfeited ……………………………….
30
not record this forfeiture until final cash settlement.)
E7-6B (5–10 minutes)
July 1
Accounts Receivable ………………………………………………
10,000
Sales …………………………..…………………………………
10,000
July 10
Cash ………………………………………………………………………
Sales Discounts ……………………………………………………..
Accounts Receivable …………………………..………….
July 17
Accounts Receivable ………………………………………………
Sales …………………………..…………………………………
July 30
Cash ………………………………………………………………………
Accounts Receivable …………………………..………….
E7-7B (10–15 minutes)
(a)
Bad Debt Expense …………………………………………………..
6,375
Allowance for Doubtful Accounts …………………….
6,375*
*.03 X ($225,000 – $12,500) = $6,375
(b)
Bad Debt Expense …………………………………………………..
1,500
Allowance for Doubtful Accounts …………………….
1,500**
E7-8B (15–20 minutes)
(a)
Allowance for Doubtful Accounts …………………………….
3,000
Accounts Receivable ………………………………………
3,000
(b)
Accounts Receivable ………………………………………………
Less: Allowance for Doubtful Accounts …………………..
Net realizable value …………………………………………
(c)
Accounts Receivable ………………………………………………
Less: Allowance for Doubtful Accounts …………………..
Net realizable value …………………………………………
E7-9B (8–10 minutes)
(a)
Bad Debt Expense …………………………………………………..
12,500
Allowance for Doubtful Accounts
[($180,000 X 5%) + $3,500] …………………………...
(b)
Bad Debt Expense …………………………………………………..
10,000
Allowance for Doubtful Accounts
($1,000,000 X 1%) ………………………………………..
E7-10B (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
(b) Bad Debt Expense – 1% of Sales = $76,000 ($7,600,000 X 1%)
E7-11B (8–10 minutes)
Balance 1/1 ($1,400 – $310)
$1,090
Over one year
E7-12B (15–20 minutes)
8/1
Accounts Receivable—Sharper Co. ………………………….
20,790
Sales ($21,000 X 99%) ……………………………………..
20,790
8/5
Cash [$57,000 X (1 – 5%)] …………………………………………
54,150
Loss on Sale of Receivables …………………………………….
Accounts Receivable ($57,000 X 99%) ………………
Sales Discounts Forfeited ………………………………..
8/9
Accounts Receivable ………………………………………………
300
Sales Discounts Forfeited
($30,000 X 1%) …………………………..………………..
300
Cash ………………………………………………………………………
Finance Charge ($20,000 X 6%) ………………………………..
Notes Payable ………………………………………………..
20,000
E7-12B (Continued)
8/11
Accounts Receivable—Sharper Co. ………………………….
210
Sales Discounts Forfeited
($21,000 X 1%) ………………………………………………
9/29
Allowance for Doubtful Accounts ……………………………..
16,800
Accounts Receivable—Sharper Co.
$21,000 – (20% X $21,000) = $16,800] ……………..
E7-13B (10–15 minutes)
(a)
Cash ………………………………………………………………………
94,000
Finance Charge ………………………………………………………
6,000
**
Notes Payable…………………………………………………
**3% X $200,000 = $6,000
(b)
Cash ………………………………………………………………………
175,000
Accounts Receivable ………………………………………
175,000
(c)
Notes Payable …………………………………………………………
100,000
Interest Expense …………………………………………………….
Cash ………………………………………………………………
*8% X $100,000 X 3/12 = $2,000
E7-14B (15–18 minutes)
1.
Cash ……………………………………………………………………….
46,000
Loss on Sale of Receivables
($50,000 X 8%) ………………………………………………………
Accounts Receivable ……………………………………….
50,000
2.
Cash ………………………………………………………………………
18,800
Finance Charge ($20,000 X 6%) ………………………………..
1,200
Notes Payable …………………………………………………
20,000
Bad Debt Expense …………………………………………………..
6,880
Allowance for Doubtful Accounts
[($122,000 X 4%) + $2,000]……………………………..
Bad Debt Expense …………………………………………………..
Allowance for Doubtful Accounts
($810,000 X 2%) …………………………………………….
E7-15B (15–20 minutes)
(a)
To be recorded as a sale, all of the following conditions would be met:
1.
The transferred asset has been isolated from the transferor (put
beyond reach of the transferor and its creditors).
either the transferred assets or beneficial interests in the transferred
E7-15B (Continued)
(b)
Computation of net proceeds:
Cash received ($262,500 X 92%) ……………
$241,500
Due from factor ($262,500 X 5%) …………..
13,125
Less: Recourse obligation …………………..
Computation of gain or loss:
Carrying value ……………………………………..
Net proceeds ……………………………………….
The following journal entry would be made:
Cash……………………………………………………………….
$241,500
Due from Factor ………………………………………………
Loss on Sale of Receivables …………………………….
Recourse Liability …………………………………….
Accounts Receivable ………………………………..
E7-16B (15–20 minutes)
(a)
To be recorded as a sale, all of the following conditions would be met:
1.
The transferred asset has been isolated from the transferor (put
beyond reach of the transferor and its creditors).
either the transferred assets or beneficial interests in the transferred
assets.
before their maturity.
E7-16B (Continued)
(b)
Computation of net proceeds:
Cash received ($200,000 X 92%) ……………..
$184,000
Due from factor ($200,000 X 6%) ……………..
12,000
$196,000
Less: Recourse obligation……………………..
4,500
Net proceeds …………………………………………
$191,500
Computation of gain or loss:
Carrying value ……………………………………..
$200,000
Net proceeds ……………………………………….
Loss on sale of receivables ………………….
$ 8,500
The following journal entry would be made:
Cash ………………………………………………………………
$184,000
Due from Factor ……………………………………………..
Loss on Sale of Receivables …………………………...
Recourse Liability ……………………………………
Accounts Receivable ……………………………….
E7-17B (10–15 minutes)
(a)
July 1
Cash ………………………………………………………………………
93,000
Due from Factor ………………………………………………………
5,000
Loss on Sale of Receivables ……………………………………
2,000
Accounts Receivable ………………………………………
($5,000 = 5% X $100,000)
($2,000 = 2% X $100,000)
(b)
July 1
Accounts Receivable …………………………..………………….
Due to KTT Corp. …………………………………………….
5,000
Cash ………………………………………………………………
E7-18B (10–15 minutes)
1.
July 1
Notes Receivable ……………………………………………………
732,053.70
Discount on Notes Receivable …………………………
232,053.70
Land ……………………………………………………….……..
375,000.00
Gain on Sale of Land ………………………………………
125,000.00
Face value of note
Present value of 1 for 4 periods at 10%
Present value of note
Face value of note
2.
July 1
Notes Receivable ……………………………………………………
400,000.00
Discount on Notes Receivable …………………………
128,037.12
Service Revenue …………………………………………….
271,962.88
Computation of the present value of
the note:
Maturity value …………………………………………………
Present value of $400,000 due
in 8 years at 10%—$400,000
X .46651 ………………………………………………………
Present value of $16,000
payable annually for 8 years
at 10% annually—$16,000
X 5.33493 …………………………………………………….
Present value of the note and
and interest ………………………………………………….
E7-19B (20–25 minutes)
(a)
Notes Receivable …………………………………………………….
100,000.00
Discount on Notes Receivable ………………………….
24,386.00
Consulting Revenue ………………………………………..
75,614.00*
$100,000 X .75614 = $75,614
(b)
Discount on Notes Receivable ………………………………….
11,342.10
Interest Revenue ……………………………………………..
11,342.10*
*$75,614 X 15%
(c)
Discount on Notes Receivable ………………………………….
Interest Revenue ……………………………………………..
Rounded by $0.48.
Cash ……………………………………………………………………….
Notes Receivable …………………………………………….
E7-20B (10–15 minutes)
(a)
Accounts Receivable ………………………………………………
685,000
Sales ……………………………………………………………..
685,000
Cash ……………………………………………………….……………..
650,000
Accounts Receivable ………………………………………
650,000
E7-20B (Continued)
(c) Monaco Company’s turnover ratio has increased. That is, it is turning
E7-21B (10–15 minutes)
(a)
Cash [$50,000 X (1 – 10%)] ……………………………………….
45,000
Due from Factor ………………………………………………………
3,000
Loss on Sale of Receivables …………………………………….
4,000
Accounts Receivable ………………………………………
Recourse Obligation ……………………………………….
Computation of cash received
Accounts receivable ………………………………………..
$50,000
Less: Due from factor (6% X $50,000) ………………
Finance charge (4% X $50,000) ………………
2,000
Cash received …………………………………………..
$45,000
Computation of net proceeds (cash and other
assets received, less any liabilities incurred)
Cash received …………………………………………………
$45,000
Due from factor ……………………………………………….
3,000
$48,000
Less: Recourse liability …………………………………..
2,000
Net proceeds …………………………………………….
$46,000
Computation of loss
Carrying (Book) value ……………………………………..
$50,000
Less: Net proceeds ………………………………………..
Loss on sale of receivables ……………………….
$ 4,000
Repair Expense ………………………………………………………..
Postage Expense ($40.00 – $12.90) …………………………...
Office Supplies ………………………………………………………..
Cash Over and Short ………………………………………………..
Cash ($200.00 – $46.50) …………………………………..
E7-21B (continued)
(b) Accounts Receivable Turnover =
Net Sales
Average Trade Receivables (net)
Net Sales
=
14.1
With the factoring transaction, Monaco Company’s turnover ratio increases by
even more than in the earlier exercise. By factoring the receivables, Monaco is
able to convert them to cash. The cost of this approach to converting
receivables to cash is captured in the Loss on Sale of Receivables account
*E7-22B (5–10 minutes)
1.
April 1
Petty Cash ………………………………………………………………
1,000
Cash ………………………………………………………………
1,000
2.
April 10
Cash Over and Short ……………………………………………….
Transportation-In (or Inventory) ……………………………….
Supplies Expense ……………………………………………………
Postage Expense …………………………………………………….
Miscellaneous Expense …………………………………………..
Cash ($1,000 – $135) ……………………………………….
3.
April 20
Petty Cash ………………………………………………………………
Cash ………………………………………………………………
*E7-23B (10–15 minutes)
Accounts Receivable—Employees
($25.00 + $12.00) ……………………………………………………
37.00
*E7-24B (15–20 minutes)
(a) WANG COMPANY
Bank Reconciliation
July 31
Balance per bank statement, July 31 ………………………..
$17,300
Add: Deposits in transit ………………………………………….
4,700a
Deduct: Outstanding checks …………………………………..
(2,200)b
Correct cash balance, July 31 ………………………………….
$19,800
Balance per books, July 31 ………………………………………
Add: Collection of note ………………………………………….
Less: Bank service charge ……………………………………..
NSF check ……………………………………………………
Corrected cash balance, July 31 ………………………………
$19,800
aComputation of deposits in transit
Deposits per books ……………………………………………
$11,620
Deposits per bank in July …………………………………..
Less: Deposits in transit (June) ………………………….
July ………………………………………………………………..
(6,920)
bComputation of outstanding checks
Checks written per books …………………………………..
$6,200
Checks cleared by bank in July …………………………..
(June)* …………………………………………………….
July ………………………………………………………………..
Outstanding checks, July 31 ……………………………………
(b)
Cash ………………………………………………………………………
1,300
Office Expenses—Bank Service Charge ……………………
30
Accounts Receivable ………………………………………………
670
Notes Receivable …………………………………………….
2,000
*E7-25B (15–20 minutes)
(a) ELFEN COMPANY
Bank Reconciliation, October 31, 2014
Tri National Bank
Balance per bank statement, October 31, 2014 …………..
$16,090
Add: Cash on hand ………………………………………………….
$ 250
Deposits in transit …………………………………………..
4,800
5,050
Deduct: Outstanding checks …………………………………….
1,550
Correct cash balance ………………………………………………..
$19,590
Balance per books, October 31, 2014
($17,801 + $45,000 – $45,271) ………………………………….
Add: Overstated check for supplies ………………………….
Note ($2,000) and interest ($40) collected …………
2,040
Deduct: Bank service charges ………………………………….
Correct cash balance
$19,590
(b)
Cash ……………………………………………………….……………..
2,040
Notes Receivable ……………………………………………
2,000
Interest Revenue …………………………..………………..
40
(To record collection of note and interest)
Office Expense—Bank Charges …………………………..…..
Cash ………………………………………………………………
(To record August bank charges)
Cash
Supplies Expense …………………………………………..
supplies)
(c) The corrected cash balance of $19,590 would be reported in the October
31, 2014, balance sheet.
*E7-26B (15-25 minutes)
(a) Journal entry to record issuance of loan by London Bank:
December 31, 2014
Notes Receivable ……………………………………………………..
100,000
Discount on Notes Receivable …………………………
(b) Note Amortization Schedule
(Before Impairment)
Date
Cash
Received
(0%)
Interest
Revenue
(12%)
Increase in
Carrying
Amount
Carrying
Amount of
Note
12/31/14
$50,663
12/31/15
Computation of the impairment loss:
at 12% ($60,000 X 0.71178) …………………………
The entry to record the loss by London Bank is as follows:
Bad Debt Expense …………………………………………………..
Allowance for Doubtful Accounts …………………….
*E7-27B (15-25 minutes)
(a) Cash received by State Construction Company on December 31, 2014:
Present value of principal ($1,000,000 X 0.49718) ….
$497,180
Present value of interest ($100,000 X 3.35216) ………
Cash received …………………………………………………….
$832,396
(b) Note Amortization Schedule
(Before Impairment)
Date
Cash
Received
(10%)
Interest
Revenue
(15%)
Increase in
Carrying
Amount
Carrying
Amount of
Note
$24,859
100,000
(c) Loss due to impairment:
Carrying amount of loan (12/31/16) …………………..
$885,843
3 years ($700,000 X 0.65752) ………………….
for 3 years ($100,000 X 2.28323) ……………………
Loss due to impairment …………………………………..
$197,256