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12/10/13 Cash and Receivables

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PROBLEMS
P7-1.

(Determine Proper Cash Balance)


2
Francis Equipment Co. closes its books regularly on December 31, but at the end of 2014 it held its cash
book open so that a more favorable balance sheet could be prepared for credit purposes. Cash receipts and
disbursements for the first 10 days of January were recorded as December transactions. The information is
given below.
1. January cash receipts recorded in the December cash book totaled $45,640, of which $28,000
represents cash sales, and $17,640 represents collections on account for which cash discounts of
$360 were given.
2. January cash disbursements recorded in the December check register liquidated accounts payable of
$22,450 on which discounts of $250 were taken.
3. The ledger has not been closed for 2014.
4. The amount shown as inventory was determined by physical count on December 31, 2014.
The company uses the periodic method of inventory.

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

Less than 16 days $300,000 .98


Between 16 and 30 days 100,000 .90
Between 31 and 45 days 80,000 .85
Between 46 and 60 days 40,000 .80
Between 61 and 75 days 20,000 .55
Over 75 days 15,000 .00

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)

P7-4. (Bad-Debt Reporting)


5
From inception of operations to December 31, 2014, Fortner Corporation provided for uncollectible
accounts receivable under the allowance method. Provisions were made monthly at 2% of credit sales, bad
debts written off were charged to the allowance account; recoveries of bad debts previously written off
were credited to the allowance account, and no year-end adjustments to the allowance account were made.
Fortner's usual credit terms are net 30 days.
The balance in Allowance for Doubtful Accounts was $130,000 at January 1, 2014. During 2014, credit
sales totaled $9,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, $90,000
of bad debts were written off, and recoveries of accounts previously written off amounted to $15,000.
Fortner installed a computer system in November 2014, and an aging of accounts receivable was prepared
for the first time as of December 31, 2014. A summary of the aging is as follows.
Classification by Month of Sale Balance in Each Category Estimated % Uncollectible
November-December 2014 $1,080,000  2%
July-October 650,000 10%
January-June 420,000 25%
Prior to 1/1/14 150,000 80%
$2,300,000

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)

P7-5. (Bad-Debt Reporting)


5
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12/10/13 Cash and Receivables

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.

P7-6. (Journalize Various Accounts Receivable Transactions)


3 4 5
The balance sheet of Starsky Company at December 31, 2013, includes the following.
Notes receivable $ 36,000
Accounts receivable 182,100
Less: Allowance for doubtful accounts 17,300 $200,800
Transactions in 2014 include the following.
1. Accounts receivable of $138,000 were collected including accounts of $60,000 on which 2% sales
discounts were allowed.
2. $5,300 was received in payment of an account which was written off the books as worthless in
2013.
3. Customer accounts of $17,500 were written off during the year.
4. At year-end, Allowance for Doubtful Accounts was estimated to need a balance of $20,000. This
estimate is based on an analysis of aged accounts receivable.

Instructions

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12/10/13 Cash and Receivables

Prepare all journal entries necessary to reflect the transactions above.

P7-7. (Assigned Accounts Receivable—Journal Entries)


8
Salen Company finances some of its current operations by assigning accounts receivable to a finance
company. On July 1, 2014, it assigned, under guarantee, specific accounts amounting to $150,000. The
finance company advanced to Salen 80% of the accounts assigned (20% of the total to be withheld until the
finance company has made its full recovery), less a finance charge of ½% of the total accounts assigned.
On July 31, Salen Company received a statement that the finance company had collected $80,000 of these
accounts and had made an additional charge of ½% of the total accounts outstanding as of July 31. This
charge is to be deducted at the time of the first remittance due Salen Company from the finance company.
(Hint: Make entries at this time.) On August 31, 2014, Salen Company received a second statement from
the finance company, together with a check for the amount due. The statement indicated that the finance
company had collected an additional $50,000 and had made a further charge of ½% of the balance
outstanding as of August 31.

Instructions
Make all entries on the books of Salen Company that are involved in the transactions above.
(AICPA adapted)

P7-8. (Notes Receivable with Realistic Interest Rate)


6
On October 1, 2014, Arden Farm Equipment Company sold a pecan-harvesting machine to Valco Brothers
Farm, Inc. In lieu of a cash payment Valco Brothers Farm gave Arden a 2-year, $120,000, 8% note (a
realistic rate of interest for a note of this type). The note required interest to be paid annually on October 1.
Arden's financial statements are prepared on a calendar-year basis.

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.

P7-9. (Notes Receivable Journal Entries)


6
On December 31, 2014, Oakbrook Inc. rendered services to Beghun Corporation at an agreed price of
$102,049, accepting $40,000 down and agreeing to accept the balance in four equal installments of $20,000
receivable each December 31. An assumed interest rate of 11% is imputed.

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.

P7-10. (Comprehensive Receivables Problem)


6

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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.

(Income Effects of Receivables Transactions)


8 9
Sandburg Company requires additional cash for its business. Sandburg has decided to use its accounts
receivable to raise the additional cash and has asked you to determine the income statement effects of the
following contemplated transactions.
1. On July 1, 2014, Sandburg assigned $400,000 of accounts receivable to Keller Finance Company.
Sandburg received an advance from Keller of 80% of the assigned accounts receivable less a
commission of 3% on the advance. Prior to December 31, 2014, Sandburg collected $220,000 on
the assigned accounts receivable, and remitted $232,720 to Keller, $12,720 of which represented
interest on the advance from Keller.

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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.

*P7-12. (Petty Cash, Bank Reconciliation)


10
Bill Jovi is reviewing the cash accounting for Nottleman, Inc., a local mailing service. Jovi's review will
focus on the petty cash account and the bank reconciliation for the month ended May 31, 2014. He has
collected the following information from Nottleman's bookkeeper for this task.
Petty Cash
1. The petty cash fund was established on May 10, 2014, in the amount of $250.
2. Expenditures from the fund by the custodian as of May 31, 2014, were evidenced by approved
receipts for the following.
Postage expense $33.00
Mailing labels and other supplies 65.00
I.O.U. from employees 30.00
Shipping charges (to customer) 57.45
Newspaper advertising 22.80
Miscellaneous expense 15.35

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

THIRD NATIONAL BANK


BANK STATEMENT
Disbursements Receipts Balance
Balance, May 1, 2014 $8,769
Deposits $28,000
Note payment direct from customer (interest of $30) 930
Checks cleared during May $31,150
Bank service charges 27
Balance, May 31, 2014 6,522

Nottleman's Cash Account


Balance, May 1, 2014 $ 8,850
Deposits during May 2014 31,000
Checks written during May 2014 (31,835)
Deposits in transit are determined to be $3,000, and checks outstanding at May 31 total $850. Cash on hand
(besides petty cash) at May 31, 2014, is $246.

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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?

*P7-13. (Bank Reconciliation and Adjusting Entries)


10
The cash account of Aguilar Co. showed a ledger balance of $3,969.85 on June 30, 2014. The bank
statement as of that date showed a balance of $4,150. Upon comparing the statement with the cash records,
the following facts were determined.
1. There were bank service charges for June of $25.
2. A bank memo stated that Bao Dai's note for $1,200 and interest of $36 had been collected on June
29, and the bank had made a charge of $5.50 on the collection. (No entry had been made on
Aguilar's books when Bao Dai's note was sent to the bank for collection.)
3. Receipts for June 30 for $3,390 were not deposited until July 2.
4. Checks outstanding on June 30 totaled $2,136.05.
5. The bank had charged the Aguilar Co.'s account for a customer's uncollectible check amounting to
$253.20 on June 29.
6. A customer's check for $90 had been entered as $60 in the cash receipts journal by Aguilar on June
15.
7. Check no. 742 in the amount of $491 had been entered in the cash journal as $419, and check no.
747 in the amount of $58.20 had been entered as $582. Both checks had been issued to pay for
purchases of equipment.

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.

*P7-14. (Bank Reconciliation and Adjusting Entries)


10
Presented below is information related to Haselhof Inc.
Balance per books at October 31, $41,847.85; receipts $173,523.91; disbursements $164,893.54. Balance
per bank statement November 30, $56,274.20.
The following checks were outstanding at November 30.
1224 $1,635.29
1230 2,468.30
1232 2,125.15
1233 482.17

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.

*P7-15. (Loan Impairment Entries)


11
On January 1, 2014, Botosan Company issued a $1,200,000, 5-year, zero-interest-bearing note to National
Organization Bank. The note was issued to yield 8% annual interest. Unfortunately, during 2015 Botosan fell
into financial trouble due to increased competition. After reviewing all available evidence on December 31,
2015, National Organization Bank decided that the loan was impaired. Botosan will probably pay back only
$800,000 of the principal at maturity.

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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