EXERCISE 7-3 (10–15 minutes)
Current assets
Accounts receivable
Customers
bank loan)
due after December 31, 2014*
Other** ($2,640 + $1,500)
Accounts (of which accounts in
the amount of $40,000 have
Investments
Advance to subsidiary company
81,000
EXERCISE 7-4 (10–15 minutes)
Computation of cost of goods sold:
Merchandise purchased
Less: Ending inventory
EXERCISE 7-4 (Continued)
Selling price = 1.4 (Cost of good sold)
= 1.4 ($230,000)
= $322,000
Sales on account
Less: Collections
Uncollected balance
Balance per ledger
EXERCISE 7-5 (15–20 minutes)
(a)
(1)
June 3
Accounts Receivable—Chester …………………………..
3,000
Sales Revenue ………………………………………………..
3,000
June 12
Cash ……………………………………………………….
2,940
Sales Discounts ($3,000 X 2%) …………………………..
Accounts Receivable—Chester ……………………….
3,000
(2)
June 3
Accounts Receivable—Chester …………………………..
2,940
Sales Revenue ($3,000 X 98%) …………………………
2,940
June 12
Cash ……………………………………………………….
2,940
Accounts Receivable—Chester ……………………….
2,940
EXERCISE 7-5 (Continued)
(b)
July 29
Cash ……………………………………………………….
3,000
Accounts Receivable—Chester ……………………….
2,940
Sales Discounts Forfeited …………………………..
EXERCISE 7-6 (5–10 minutes)
July 1
Accounts Receivable ………………………………………………
20,000
Sales Revenue ……………………………………………….
20,000
July 10
Cash ……………………………………………………….
Sales Discounts ………………………………………………………
Accounts Receivable …………………………..
20,000
July 17
Accounts Receivable ………………………………………………
Sales Revenue ……………………………………………….
July 30
Cash ……………………………………………………….
Accounts Receivable …………………………..
EXERCISE 7-7 (10–15 minutes)
(a)
Bad Debt Expense …………………………………………………..
8,500
Allowance for Doubtful Accounts …………………….
8,500*
*.01 X ($900,000 – $50,000) = $8,500
(b)
Bad Debt Expense …………………………………………………..
3,000
Allowance for Doubtful Accounts …………………….
3,000*
EXERCISE 7-8 (15–20 minutes)
(a)
Allowance for Doubtful Accounts …………………………..
6,000
Accounts Receivable …………………………..
6,000
(b)
Accounts Receivable
Less: Allowance for Doubtful Accounts
Net realizable value
(c)
Accounts Receivable
Less: Allowance for Doubtful Accounts
Net realizable value
EXERCISE 7-9 (8–10 minutes)
(a)
Bad Debt Expense …………………………………………………..
5,350
Allowance for Doubtful Accounts …………………….
($90,000 X 4%) + $1,750 = $5,350
(b)
Bad Debt Expense …………………………………………………..
6,800
Allowance for Doubtful Accounts …………………….
$680,000 X 1% = $6,800
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
EXERCISE 7-11 (8–10 minutes)
Balance 1/1 ($700 – $155)
Over one year
4/12 (#2412) ($1,710 – $1,000 – $300*)
Eight months and 19 days
11/18 (#5681) ($2,000 – $1,250)
One month and 13 days
Inasmuch as later invoices have been paid in full, all three of these
amounts should be investigated in order to determine why Hopkins Co. has
not paid them. The amounts in the beginning balance and #2412 should be
of particular concern.
EXERCISE 7-12 (15–20 minutes)
7/1
Accounts Receivable—Harding Co. ………………………….
7,840
Sales Revenue ($8,000 X 98%) …………………………
7,840
7/5
Cash [$9,000 X (1 – .09)]…………………………..
8,190
Loss on Sale of Receivables …………………………..
Accounts Receivable ($9,000 X 98%) ………………..
8,820
Sales Discounts Forfeited …………………………..
EXERCISE 7-12 (Continued)
7/9
Accounts Receivable ……………………………………………….
180
Sales Discounts Forfeited
($9,000 X 2%) ……………………………………………….
180
Cash ……………………………………………………….
5,640
Interest Expense ($6,000 X 6%) …………………………..
360
Notes Payable …………………………………………………
7/11
Account Receivable—Harding Co. …………………………..
160
Sales Discounts Forfeited …………………………..
($8,000 X 2%)
This entry may be made at the next time financial statements are
prepared. Also, it may occur on 12/29 when Harding Company’s
receivable is adjusted.
12/29
Allowance for Doubtful Accounts …………………………..
7,200
Accounts Receivable—Harding Co. …………………….
[$7,840 + $160 = $8,000;
EXERCISE 7-13 (10–15 minutes)
(a)
Cash ………………………………………………………………………
192,000
Interest Expense …………………………………………………….
Notes Payable ………………………………………………..
*2% X $400,000 = $8,000
Accounts Receivable …………………………..
EXERCISE 7-13 (Continued)
(c)
Notes Payable …………………………..…………………………..
200,000
Interest Expense …………………………………………………….
Cash ……………………………………………………….
*10% X $200,000 X 3/12 = $5,000
EXERCISE 7-14 (15–18 minutes)
1.
Cash ……………………………………………………….
22,500
Loss on Sale of Receivables …………………………..
2,500
($25,000 X 10%)
Accounts Receivable …………………………..
25,000
2.
Cash ……………………………………………………….
50,600
Interest Expense ($55,000 X 8%) …………………………..
4,400
Notes Payable …………………………………………………
55,000
3.
Bad Debt Expense …………………………………………………..
6,220
Allowance for Doubtful Accounts …………………….
[($82,000 X 5%) + $2,120]
4.
Bad Debt Expense …………………………………………………..
6,450
Allowance for Doubtful Accounts …………………….
($430,000 X 1.5%)
EXERCISE 7-15 (10–15 minutes)
Computation of net proceeds:
Cash received
Less: Recourse liability
EXERCISE 7-15 (Continued)
Computation of gain or loss:
Carrying value
$200,000
Net proceeds
The following journal entry would be made:
Cash ………………………………………………………………
$160,000
Loss on Sale of Receivables …………………………..
Recourse Liability ……………………………………
Accounts Receivable …………………………..
EXERCISE 7-16 (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).
(2)
The transferees have obtained the right to pledge or to exchange
(b)
Computation of net proceeds:
Cash received ($175,000 X 94%)
$164,500
Due from factor ($175,000 X 4%)
7,000
$171,500
Less: Recourse liability
2,000
EXERCISE 7-16 (Continued)
Computation of gain or loss:
Carrying value
Net proceeds
Loss on sale of receivables
The following journal entry would be made:
Cash ……………………………………………………….
164,500
Due from Factor ………………………………………………
Loss on Sale of Receivables …………………………..
Recourse Liability …………………………..
Accounts Receivable …………………………..
EXERCISE 7-17 (10–15 minutes)
(a)
July 1
Cash ……………………………………………………….
283,500
Due from Factor ………………………………………………………
12,000*
Loss on Sale of Receivables …………………………..
**(1 1/2% X $300,000) = $4,500
(b)
July 1
Accounts Receivable …………………………..
300,000
Due to JFK Corp. …………………………..
Interest Revenue …………………………..
Cash ……………………………………………………….
EXERCISE 7-18 (10–15 minutes)
1.
7/1/14
Notes Receivable …………………………………………………….
1,101,460.00
Discount on Notes Receivable …………………………
401,460.00
Land ……………………………………………………….
590,000.00
Gain on Disposal of Land …………………………..
110,000.00
Computation of the discount
Face value of note
Present value of 1 for 4 periods at 12%
Present value of note
Face value of note
2.
7/1/14
Notes Receivable …………………………………………………….
400,000.00
Discount on Notes Receivable …………………………
178,836.32
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 7-19 (20–25 minutes)
(a)
Notes Receivable ……………………………………………………
200,000
Discount on Notes Receivable …………………………
34,710
Service Revenue ……………………………………………
$200,000 X .82645 = $165,290
(b)
Discount on Notes Receivable …………………………..
16,529
Interest Revenue ……………………………………………
16,529*
*$165,290 X 10% = $16,529
(c)
Discount on Notes Receivable …………………………..
18,181*
Interest Revenue …………………………………………….
18,181
*$34,710 – $16,529 (or [$165,290 + $16,529] X 10%)
Cash ………………………………………………………………………
200,000
Notes Receivable …………………………………………..
EXERCISE 7-20 (10–15 minutes)
(a)
Accounts Receivable ………………………………………………
100,000
Sales Revenue ………………………………………………..
Cash ………………………………………………………………………
Accounts Receivable …………………………..
EXERCISE 7-20 (Continued)
(b) Accounts Receivable Turnover =
Net Sales
Average Trade Receivables (net)
Average Trade Receivables (net)
($15,000 + $45,000*)/2
(c) Jones Company’s turnover ratio has declined significantly. That is, it
is turning receivables 3.33 times a year and collections on receivables
EXERCISE 7-21
(a)
Cash [$25,000 X (1 – .09)] …………………………………………
22,750
Due from Factor ………………………………………………………
1,250
Loss on Sale of Accounts Receivable ………………………
2,200
Accounts Receivable …………………………..
Recourse Liability …………………………………………..
Computation of cash received
Accounts receivable ……………………………………….
Less: Due from factor (5% X $25,000) ……………….
Finance charge (4% X $25,000) ………………
1,000
Cash received …………………………………………..
Cash received …………………………………………………
Due from factor ………………………………………………
$24,000
Less: Recourse liability …………………………..
EXERCISE 7-21 (Continued)
Computation of loss
Less: Net proceeds …………………………………………
Loss on sale of receivables ……………………….
(b) Accounts Receivable Turnover =
Net Sales
Average Trade Receivables (net)
Net Sales
With the factoring transaction, Jones Company’s turnover ratio still declines
but by less than in the earlier exercise. While Jones’ collections have
*EXERCISE 7-22 (5–10 minutes)
1.
April 1
Petty Cash ……………………………………………………….
200
Cash ……………………………………………………….
200
2.
April 10
Freight-In (or Invertory) …………………………..
60
Supplies Expense …………………………..
25
Postage Expense …………………………………………………….
33
Accounts Receivable—Employees …………………………..
17
Miscellaneous Expense …………………………..
36
Cash Over and Short …………………………..
Cash ($200 – $27) …………………………..
173
3.
April 20
Petty Cash ……………………………………………………….
100
Cash ……………………………………………………….
100
*EXERCISE 7-23 (10–15 minutes)
Accounts Receivable—Employees …………………………..
74.00
($40.00 + $34.00)
Maintenance and Repairs Expense …………………………..
14.35
Postage Expense ($20.00 – $2.90) …………………………..
17.10
Supplies Expense ……………………………………………………
Cash Over and Short ……………………………………………….
Cash ($300.00 – $15.20) ……………………………………
*EXERCISE 7-24 (15–20 minutes)
(a) Angela Lansbury Company
Bank Reconciliation
July 31
Balance per bank statement, July 31
$8,650
Add: Deposits in transit
2,350a
Deduct: Outstanding checks
(1,100)b
Correct cash balance, July 31
$9,900
Add: Collection of note
Less: Bank service charge
NSF check
aComputation of deposits in transit
Deposits per books
$5,810
Deposits per bank in July
$5,000
Less deposits in transit (June)
July
(3,460)
Deposits in transit, July 31
bComputation of outstanding checks
Checks written per books
$3,100
Checks cleared by bank in July
$4,000
(June)*
July
(2,000)
Outstanding checks, July 31
*EXERCISE 7-24 (Continued)
(b)
Cash ………………………………………………………………………
650
Office Expenses—bank service charges …………………..
Accounts Receivable ………………………………………………
335
Notes Receivable…………………………………………….
*EXERCISE 7-25 (15–20 minutes)
(a) Logan Bruno Company
Bank Reconciliation, August 31, 2014
County National Bank
Balance per bank statement, August 31, 2014
$ 8,089
Add: Cash on hand
Balance per books, August 31, 2014
($10,050 + $35,000 – $34,903)
$10,147
Add: Note ($1,000) and interest ($40) collected
1,040
Deduct: Bank service charges
Understated check for supplies
38
(b)
Cash ………………………………………………………………………
Notes Receivable…………………………………………….
Interest Revenue …………………………………………….
(To record collection of note and interest)
*EXERCISE 7-25 (Continued)
Office Expense—bank service charges …………………….
20
Cash ………………………………………………………………
(To record August bank charges)
Supplies Expense …………………………..……………………….
18
Cash ………………………………………………………………
supplies)
*EXERCISE 7-26 (15-25 minutes)
(a) Journal entry to record issuance of loan by Paris Bank:
December 31, 2014
Notes Receivable………………………………………………………
100,000
Discount on Notes Receivable ………………………….
(b) Note Amortization Schedule
(Before Impairment)
Date
Cash
Received
(0%)
Interest
Revenue
(10%)
Increase in
Carrying
Amount
Carrying
Amount of
Note
12/31/14
$62,092
12/31/15
Computation of the impairment loss:
Carrying amount of investment (12/31/16)……………..
Loss due to impairment ……………………………………….
The entry to record the loss by Paris Bank is as follows:
Bad Debt Expense …………………………………………………..
18,782
Allowance for Doubtful Accounts …………………….
18,782
*EXERCISE 7-27 (15-25 minutes)
(a) Cash received by Conchita Martinez Company on December 31, 2014:
Present value of interest ($100,000 X 3.60478) ……….
Cash received ……………………………………………………..
$927,908
(b) Note Amortization Schedule
(Before Impairment)
Date
Cash
Received
(10%)
Interest
Revenue
(12%)
Increase in
Carrying
Amount
Carrying
Amount of
Note
12/31/14
$927,908
12/31/15
(c) Loss due to impairment:
Carrying amount of loan (12/31/16) …………………..
$951,968
Loss due to impairment …………………………………..
$284,717