PROBLEMS
P7-1.
Instructions
(a) Prepare any entries you consider necessary to correct Francis's accounts at December 31.
(b) To what extent was Francis Equipment Co. able to show a more favorable balance sheet at
December 31 by holding its cash book open? (Compute working capital and the current ratio.)
Assume that the balance sheet that was prepared by the company showed the following amounts:
Dr. Cr.
Cash $39,000
Accounts receivable 42,000
Inventory 67,000
Accounts payable $45,000
Other current liabilities 14,200
P7-2.
(Bad-Debt Reporting)
5
The following are a series of unrelated situations.
1. Halen Company's unadjusted trial balance at December 31, 2014, included the following accounts.
Debit Credit
Allowance for doubtful accounts $4,000
Net sales $1,200,000
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12/10/13 Cash and Receivables
Halen Company estimates its bad debt expense to be 1½% of net sales. Determine its bad debt
expense for 2014.
2. An analysis and aging of Stuart Corp. accounts receivable at December 31, 2014, disclosed the
following.
Amounts estimated to be uncollectible $ 180,000
Accounts receivable 1,750,000
Allowance for doubtful accounts (per books) 125,000
What is the net realizable value of Stuart's receivables at December 31, 2014?
3. Shore Co. provides for doubtful accounts based on 3% of credit sales. The following data are
available for 2014.
Credit sales during 2014 $2,400,000
Allowance for doubtful accounts 1/1/14 17,000
Collection of accounts written off in prior years (customer credit was 8,000
reestablished)
Customer accounts written off as uncollectible during 2014 30,000
What is the balance in Allowance for Doubtful Accounts at December 31, 2014?
4. At the end of its first year of operations, December 31, 2014, Darden Inc. reported the following
information.
Accounts receivable, net of allowance for doubtful accounts $950,000
Customer accounts written off as uncollectible during 2014 24,000
Bad debt expense for 2014 84,000
What should be the balance in accounts receivable at December 31, 2014, before subtracting the
allowance for doubtful accounts?
5. The following accounts were taken from Bullock Inc.'s trial balance at December 31, 2014.
Debit Credit
Net credit sales $750,000
Allowance for doubtful accounts $ 14,000
Accounts receivable 310,000
If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be reported
for 2014.
Instructions
Answer the questions relating to each of the five independent situations as requested.
P7-3.
(Bad-Debt Reporting—Aging)
5
Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-end
adjustments, the balance in Manilow's Accounts Receivable account was $555,000 and Allowance for
Doubtful Accounts had a credit balance of $40,000. The year-end balance reported in the balance sheet for
Allowance for Doubtful Accounts will be based on the aging schedule shown below.
Amount
Days Account Outstanding Probability of Collection
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12/10/13 Cash and Receivables
Instructions
(a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end?
(b) Show how accounts receivable would be presented on the balance sheet.
(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?
(CMA adapted)
Based on the review of collectibility of the account balances in the “prior to 1/1/14” aging category,
additional receivables totaling $60,000 were written off as of December 31, 2014. The 80% uncollectible
estimate applies to the remaining $90,000 in the category. Effective with the year ended December 31,
2014, Fortner adopted a different method for estimating the allowance for doubtful accounts at the amount
indicated by the year-end aging analysis of accounts receivable.
Instructions
(a) Prepare a schedule analyzing the changes in Allowance for Doubtful Accounts for the year ended
December 31, 2014. Show supporting computations in good form.
(Hint: In computing the 12/31/14 allowance, subtract the $60,000 write-off.)
(b) Prepare the journal entry for the year-end adjustment to Allowance for Doubtful Accounts
balance as of December 31, 2014.
(AICPA adapted)
Presented below is information related to the Accounts Receivable accounts of Gulistan Inc. during the
current year 2014.
1. An aging schedule of the accounts receivable as of December 31, 2014, is as follows.
Net Debit
Age Balance % to Be Applied after Correction Is Made
Under 60 $172,342 1%
days
60-90 days 136,490 3%
91-120 days 39,924* 6%
Over 120 23,644 $3,700 definitely uncollectible; estimated remainder
days uncollectible is 25%
$372,400
* The $3,240 write-off of receivables is related to the 91-to-120 day category.
2. The Accounts Receivable control account has a debit balance of $372,400 on December 31, 2014.
3. Two entries were made in the Bad Debt Expense account during the year: (1) a debit on December
31 for the amount credited to Allowance for Doubtful Accounts, and (2) a credit for $3,240 on
November 3, 2014, and a debit to Allowance for Doubtful Accounts because of a bankruptcy.
4. Allowance for Doubtful Accounts is as follows for 2014.
Allowance for Doubtful Accounts
Nov. 3 Uncollectible accounts Jan. 1 Beginning balance 8,750
written off 3,240 Dec. 31 5% of $372,400 18,620
5. A credit balance exists in Accounts Receivable (60-90 days) of $4,840, which represents an advance
on a sales contract.
Instructions
Assuming that the books have not been closed for 2014, make the necessary correcting entries.
Instructions
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12/10/13 Cash and Receivables
Instructions
Make all entries on the books of Salen Company that are involved in the transactions above.
(AICPA adapted)
Instructions
Assuming Valco Brothers Farm fulfills all the terms of the note, prepare the necessary journal entries for
Arden Farm Equipment Company for the entire term of the note.
Instructions
Prepare the entries that would be recorded by Oakbrook Inc. for the sale and for the receipts and interest on
the following dates. (Assume that the effective-interest method is used for amortization purposes.)
(a) December 31, 2014.
(b) December 31, 2015.
(c) December 31, 2016.
(d) December 31, 2017.
(e) December 31, 2018.
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12/10/13 Cash and Receivables
Braddock Inc. had the following long-term receivable account balances at December 31, 2013.
Note receivable from sale of division $1,500,000
Note receivable from officer 400,000
Transactions during 2014 and other information relating to Braddock's long-term receivables were as
follows.
1. The $1,500,000 note receivable is dated May 1, 2013, bears interest at 9%, and represents the
balance of the consideration received from the sale of Braddock's electronics division to New York
Company. Principal payments of $500,000 plus appropriate interest are due on May 1, 2014, 2015,
and 2016. The first principal and interest payment was made on May 1, 2014. Collection of the note
installments is reasonably assured.
2. The $400,000 note receivable is dated December 31, 2013, bears interest at 8%, and is due on
December 31, 2016. The note is due from Sean May, president of Braddock Inc. and is collateralized
by 10,000 shares of Braddock's common stock. Interest is payable annually on December 31, and all
interest payments were paid on their due dates through December 31, 2014. The quoted market price
of Braddock's common stock was $45 per share on December 31, 2014.
3. On April 1, 2014, Braddock sold a patent to Pennsylvania Company in exchange for a $100,000 zero-
interest-bearing note due on April 1, 2016. There was no established exchange price for the patent,
and the note had no ready market. The prevailing rate of interest for a note of this type at April 1,
2014, was 12%. The present value of $1 for two periods at 12% is 0.797 (use this factor). The
patent had a carrying value of $40,000 at January 1, 2014, and the amortization for the year ended
December 31, 2014, would have been $8,000. The collection of the note receivable from
Pennsylvania is reasonably assured.
4. On July 1, 2014, Braddock sold a parcel of land to Splinter Company for $200,000 under an
installment sale contract. Splinter made a $60,000 cash down payment on July 1, 2014, and signed a
4-year 11% note for the $140,000 balance. The equal annual payments of principal and interest on
the note will be $45,125 payable on July 1, 2015, through July 1, 2018. The land could have been
sold at an established cash price of $200,000. The cost of the land to Braddock was $150,000.
Circumstances are such that the collection of the installments on the note is reasonably assured.
Instructions
(a) Prepare the long-term receivables section of Braddock's balance sheet at December 31, 2014.
(b) Prepare a schedule showing the current portion of the long-term receivables and accrued interest
receivable that would appear in Braddock's balance sheet at December 31, 2014.
(c) Prepare a schedule showing interest revenue from the long-term receivables that would appear on
Braddock's income statement for the year ended December 31, 2014.
P7-11.
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12/10/13 Cash and Receivables
2. On December 1, 2014, Sandburg sold $300,000 of net accounts receivable to Wunsch Company for
$270,000. The receivables were sold outright on a without recourse basis.
3. On December 31, 2014, an advance of $120,000 was received from First Bank by pledging
$160,000 of Sandburg's accounts receivable. Sandburg's first payment to First Bank is due on
January 30, 2015.
Instructions
Prepare a schedule showing the income statement effects for the year ended December 31, 2014, as a result
of the above facts.
On May 31, 2014, the petty cash fund was replenished and increased to $300; currency and coin in the
fund at that time totaled $26.40.
Bank Reconciliation
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12/10/13 Cash and Receivables
Instructions
(a) Prepare the journal entries to record the transactions related to the petty cash fund for May.
(b) Prepare a bank reconciliation dated May 31, 2014, proceeding to a correct cash balance, and
prepare the journal entries necessary to make the books correct and complete.
(c) What amount of cash should be reported in the May 31, 2014, balance sheet?
Instructions
(a) Prepare a bank reconciliation dated June 30, 2014, proceeding to a correct cash balance.
(b) Prepare any entries necessary to make the books correct and complete.
Included with the November bank statement and not recorded by the company were a bank debit memo for
$27.40 covering bank charges for the month, a debit memo for $372.13 for a customer's check returned
and marked NSF, and a credit memo for $1,400 representing bond interest collected by the bank in the
name of Haselhof Inc. Cash on hand at November 30 recorded and awaiting deposit amounted to
$1,915.40.
Instructions
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12/10/13 Cash and Receivables
(a) Prepare a bank reconciliation (to the correct balance) at November 30, for Haselhof Inc. from the
information above.
(b) Prepare any journal entries required to adjust the cash account at November 30.
Instructions
(a) Prepare journal entries for both Botosan Company and National Organization Bank to record the
issuance of the note on January 1, 2014. (Round to the nearest $10.)
(b) Assuming that both Botosan Company and National Organization Bank use the effective-interest
method to amortize the discount, prepare the amortization schedule for the note.
(c) Under what circumstances can National Organization Bank consider Botosan's note to be
impaired?
(d) Compute the loss National Organization Bank will suffer from Botosan's financial distress on
December 31, 2015. What journal entries should be made to record this loss?
Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.
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