ACCT 3110 Ch 7 Homework E 4 8 13 19 20 27

4. (Determining Ending Accounts Receivable) Your accounts receivable clerk, Mitra

Adams, to whomyou pay a salary of $1,500 per month, has just purchased a new
Acura. You decided to test the accuracy of the accounts receivable balance of
$82,000 as shown in the ledger.
The following information is available for your first year in business.
(1) Collections from customers $198,000
(2) Merchandise purchased 320,000
(3) Ending merchandise inventory 90,000
(4) Goods are marked to sell at 40% above cost

EXERCISE 7-4 (1015 minutes)

Computation of cost of goods sold:

Merchandise purchased $320,000
Less: Ending inventory 90,000
Cost of goods sold $230,000

Selling price = 1.4 (Cost of good sold)

= 1.4 ($230,000)
= $322,000

Sales on account $322,000

Less: Collections 198,000
Uncollected balance 124,000
Balance per ledger 82,000
Apparent shortage $ 42,000 Enough for a new car

8. (Recording Bad Debts) At the end of 2014, Aramis Company has accounts
receivable of $800,000 and an allowance for doubtful accounts of $40,000. On
January 16, 2015, Aramis Company determined that its receivable from Ramirez
Company of $6,000 will not be collected, and management authorized its write-off.
 (a) Prepare the journal entry for Aramis Company to write off the Ramirez
receivable.
(b) What is the net realizable value of Aramis Companys accounts receivable before
the write-off of the Ramirez receivable?
(c) What is the net realizable value of Aramis Companys accounts receivable after
the write-off of the Ramirez receivable?

EXERCISE 7-8 (1520 minutes)

(a) Allowance for Doubtful Accounts................................... 6,000

Accounts Receivable............................................... 6,000

(b) Accounts Receivable $800,000

Less: Allowance for Doubtful Accounts 40,000
Net realizable value $760,000

(c) Accounts Receivable $794,000

Less: Allowance for Doubtful Accounts 34,000
Net realizable value $760,000

13. (Assigning Accounts Receivable) On April 1, 2014, Rasheed Company assigns

$400,000 of its accounts receivable to the Third National Bank as collateral for a
$200,000 loan due July 1, 2014. The assignment agreement calls for Rasheed
Company to continue to collect the receivables. Third National Bank assesses a
finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a
realistic rate of interest for a note of this type).
(a) Prepare the April 1, 2014, journal entry for Rasheed Company.
(b) Prepare the journal entry for Rasheeds collection of $350,000 of the accounts
receivable during the period from April 1, 2014, through June 30, 2014.
(c) On July 1, 2014, Rasheed paid Third National all that was due from the loan it
secured on April 1, 2014. Prepare the journal entry to record this payment.
EXERCISE 7-13 (1015 minutes)

(a) Cash ...................................................................................

192,000
Interest Expense............................................................... 8,000*
Notes Payable.......................................................... 200,000

*2% X $400,000 = $8,000

(b) Cash ...................................................................................

350,000
Accounts Receivable............................................... 350,000

(c) Notes Payable 200,000

Interest Expense 5,000*
Cash 205,000

*10% X $200,000 X 3/12 = $5,000

19. (Notes Receivable with Unrealistic Interest Rate) On December 31, 2012, Ed
Abbey Co. performed environmental consulting services for Hayduke Co. Hayduke
was short of cash, and Abbey Co. agreed to
accept a $200,000 zero-interest-bearing note due December 31, 2014, as payment in
full. Hayduke is somewhat of a credit risk and typically borrows funds at a rate of
10%. Abbey is much more creditworthy and has various lines of credit at 6%.
(a) Prepare the journal entry to record the transaction of December 31, 2012, for the
Ed Abbey Co.
(b) Assuming Ed Abbey Co.s fiscal year-end is December 31, prepare the journal
entry for December31, 2013.
(c) Assuming Ed Abbey Co.s fiscal year-end is December 31, prepare the journal
entry for December 31, 2014.

EXERCISE 7-19 (2025 minutes)

(a) Notes Receivable .............................................................

200,000
Discount on Notes Receivable............................... 34,710
Service Revenue ..................................................... 165,290*

*Computation of present value of note:

PV of $200,000 due in 2 years at 10%
$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 .................................................... 200,000
20. (Analysis of Receivables) Presented below is information for Jones Company.
1. Beginning-of-the-year Accounts Receivable balance was $15,000.
2. Net sales (all on account) for the year were $100,000. Jones does not offer cash
discounts.
3. Collections on accounts receivable during the year were $70,000.
Instructions
(a) Prepare (summary) journal entries to record the items noted above.
(b) Compute Joness accounts receivable turnover for the year. The company does
not believe it will have any bad debts.
(c) Use the turnover ratio computed in (b) to analyze Joness liquidity. The turnover
ratio last year was 6.0.
EXERCISE 7-20 (1015 minutes)

(a) Accounts Receivable........................................................

100,000
Sales Revenue......................................................... 100,000

Cash...................................................................................
70,000
Accounts Receivable............................................... 70,000

Net Sales
(b) Accounts Receivable Turnover =
Average Trade Receivables (net)

Net Sales $100,000

= = 3.33 times
Average Trade Receivables (net) ($15,000 + $45,000*)/2

*$15,000 + $100,000 $70,000

Days to collect accounts 365

= = 110 days
receivable 3.33

(c) Jones Companys turnover ratio has declined significantly. That is, it is turning
receivables 3.33 times a year and collections on receivables took 110 days. In
the prior year, the turnover ratio was almost double (6.0) and collections took
only 61 days. This is a bad trend in liquidity. Jones should consider offering
early payment discounts and/or tightened credit and collection policies.

27. (Impairments) On December 31, 2014, Conchita Martinez Company signed a

$1,000,000 note to Sauk City Bank. The market interest rate at that time was 12%. The
stated interest rate on the note was 10%, payable annually. The note matures in 5
years. Unfortunately, because of lower sales, Conchita Martinezs financial situation
worsened. On December 31, 2016, Sauk City Bank determined that it was probable
that the company would pay back only $600,000 of the principal at maturity. However,
it was considered likely that interest would continue to be paid, based on the
$1,000,000 loan.
(a) Determine the amount of cash Conchita Martinez received from the loan on
December 31, 2014.
(b) Prepare a note amortization schedule for Sauk City Bank up to December 31,
2016.
(c) Determine the loss on impairment that Sauk City Bank should recognize on
December 31, 2016.
*EXERCISE 7-27 (15-25 minutes)

(a) Cash received by Conchita Martinez Company on December 31, 2014:

Present value of principal ($1,000,000 X .56743)....... $567,430

Present value of interest ($100,000 X 3.60478).......... 360,478
Cash received............................................................... $927,908

(b) Note Amortization Schedule

(Before Impairment)

Cash Interest Increase in Carrying

Received Revenue Carrying Amount of
Date (10%) (12%) Amount Note
12/31/14 $927,908
12/31/15 $100,000 $111,349 $11,349 939,257
12/31/16 100,000 112,711 12,711 951,968

(c) Loss due to impairment:

Carrying amount of loan (12/31/16)........................ $951,968
Less: Present value of $600,000 due in
3 years ($600,000 X .71178)......................... 427,068
Present value of $100,000 payable annually
for 3 years ($100,000 X 2.40183)......................... 240,183 667,251
Loss due to impairment.......................................... $284,717