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Multiple ChoiceCircle the correct answer for each question:
In what accounts should the following items be classified?
Answer each question with a single word.
1) Coins and currency._____________________________________________________________________
2) U.S Treasury (government) bonds_____________________________________________________________________
3) Certificate of deposit_____________________________________________________________________
4) Cash in a bank that is in receivership _____________________________________________________________________
5) NSF check (returned with bank statement)_____________________________________________________________________
6) Deposit in foreign bank (exchangeability limited)_____________________________________________________________________
7) Postdated checks._____________________________________________________________________
8) Cash to be used for retirement of long term bonds._____________________________________________________________________
9) Deposits in Transit_____________________________________________________________________
10) 100 shares of Dell stock (intention is to sell in one year or less)_____________________________________________________________________
11) Savings and checking accounts. _____________________________________________________________________
12) Petty Cash_____________________________________________________________________
13) Stamps_____________________________________________________________________
14) Travel Advances
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_____________________________________________________________________15) Springsteen Inc. reported in a recent annual report “Restricted cash for debt
redemption.” What section of the balance sheet would report this item?_____________________________________________________________________
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Short Answers1) What may be included under the heading of “cash”?
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2) Define a “compensating balance.” How should a compensating balance be reported?_____________________________________________________________________
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3) What are the reasons that a company gives trade discounts? Why are trade discounts not recorded in the accounts like cash discounts?_____________________________________________________________________
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4) What are two methods of recording accounts receivable transactions when a cash discount situation is involved? Which is more theoretically correct? Which is used in practice more of the time? Why?_____________________________________________________________________
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5) What are the basic problems that occur in the valuation of accounts receivable?_____________________________________________________________________
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6) What the theoretical justification of the allowance method is as contrasted with the direct write off method of accounting for bad debts?‐ __________________________________________________________________________________________________________________________________________
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7) Indicate how well the percentage of sales method and the aging method accomplish‐ ‐ the objectives of the allowance method of accounting for bad debts._____________________________________________________________________
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8) Of what merit is the contention that the allowance method lacks the objectivity of the direct write off method? Discuss in terms of accounting's measurement function.‐_____________________________________________________________________
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9) Explain how the accounting for bad debts can be used for earnings management.Page 4 of 33
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10) Because of calamitous earthquake losses, Bernstein Company, one of your client's oldest and largest customers, suddenly and unexpectedly became bankrupt. Approximately 30% of your client's total sales have been made to Bernstein Company during each of the past several years. The amount due from Bernstein Company—none of which is collectible—equals 22% of total accounts receivable, an amount that is considerably in excess of what was determined to be an adequate provision for doubtful accounts at the close of the preceding year. How would your client record the write off of the Bernstein Company receivable if it is using the ‐allowance method of accounting for bad debts? Justify your suggested treatment._____________________________________________________________________
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11) What is the normal procedure for handling the collection of accounts receivable previously written off using the direct write off method? The allowance method?‐_____________________________________________________________________
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12) On January 1, 2012, Lombard Co. sells property for which it had paid $690,000 to Sargent Company, receiving in return Sargent's zero interest bearing note for ‐ ‐$1,000,000 payable in 5 years. What entry would Lombard make to record the sale,
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assuming that Lombard frequently sells similar items of property for a cash sales price of $640,000?_____________________________________________________________________
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13) What is “imputed interest”? In what situations is it necessary to impute an interest
rate for notes receivable? What are the considerations in imputing an appropriate
interest rate?
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14) What is the fair value option? Where do companies that elect the fair value option report unrealized holding gains and losses?_____________________________________________________________________
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15) Indicate three reasons why a company might sell its receivables to another company._____________________________________________________________________
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16) When is the financial components approach to recording the transfers of receivables used? When should a transfer of receivables be recorded as a sale?_____________________________________________________________________
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17) Moon Hardware is planning to factor some of its receivables. The cash received will be used to pay for inventory purchases. The factor has indicated that it will require “recourse” on the sold receivables. Explain to the controller of Moon Hardware what “recourse” is and how the recourse will be reflected in Moon's financial statements after the sale of the receivables._____________________________________________________________________
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18) What is the accounts receivable turnover ratio, and what type of information does it provide?_____________________________________________________________________
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19) You are evaluating Woodlawn Racetrack for a potential loan. An examination of the notes to the financial statements indicates restricted cash at year end amounts‐ to $100,000. Explain how you would use this information in evaluating Woodlawn's liquidity._____________________________________________________________________
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20) Distinguish among the following: (1) a general checking account, (2) an imprest bank account, and (3) a lockbox account._____________________________________________________________________
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21) What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in an impairment?_____________________________________________________________________
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22) What is meant by impairment of a loan? Under what circumstances should a creditor recognize an impaired loan?_____________________________________________________________________
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1) Horizon Outfitters Company includes in its trial balance for December 31 an item for Accounts
Receivable $789,000. This balance consists of the following items:
Due from regular customers $523,000
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Refund receivable on prior year's income taxes (an established claim) 15,500
Travel advance to employees 22,000
Loan to wholly owned subsidiary 45,500
Advances to creditors for goods ordered 61,000
Accounts receivable assigned as security for loans payable 75,000
Notes receivable past due plus interest on these notes 47,000
Total $789,000
Illustrate how these items should be shown in the balance sheet as of December 31.
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E7.1.(determining Cash Balance)
The controller for Weinstein Co. is attempting to determine the amount of cash and cash equivalents to be reported on its December 31, 2012, balance sheet. The following information is provided.
1. Commercial savings account of $600,000 and a commercial checking account balance of $800,000 are held at First National Bank of Olathe.
2. Money market fund account held at Volonte Co. (a mutual fund organization) permits Weinstein to write checks on this balance, $5,000,000.
3. Travel advances of $180,000 for executive travel for the first quarter of next year (employee to reimburse through salary reduction).
4. A separate cash fund in the amount of $1,500,000 is restricted for the retirement of long‐term debt.
5. Petty cash fund of $1,000.6. An I.O.U. from Marianne Koch, a company customer, in the amount of $150,000.7. A bank overdraft of $110,000 has occurred at one of the banks the company uses to deposit its
cash receipts. At the present time, the company has no deposits at this bank.8. The company has two certificates of deposit, each totaling $500,000. These CDs have a
maturity of 120 days.9. Weinstein has received a check that is dated January 12, 2013, in the amount of $125,000.10. Weinstein has agreed to maintain a cash balance of $500,000 at all times at First National Bank
of Olathe to ensure future credit availability.11. Weinstein has purchased $2,100,000 of commercial paper of Sergio Leone Co. which is due in
60 days.12. Currency and coin on hand amounted to $7,700.
Instructions
(a)Compute the amount of cash to be reported on Weinstein Co.'s balance sheet at December 31, 2012.
(b)Indicate the proper reporting for items that are not reported as cash on the December 31, 2012, balance sheet.
E7.4.(determine Ending Accounts Receivable)Your accounts receivable clerk, Mary Herman, to whom you pay a salary of $1,500 per month, has just purchased a new Audi. You decided to test the accuracy of the accounts receivable balance of $117,000 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 70,000
(4) Goods are marked to sell at 40% above cost
InstructionsCompute an estimate of the ending balance of accounts receivable from customers that should appear in
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the ledger and any apparent shortages. Assume that all sales are made on account.
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E7.5.(record Sales Gross and Net)On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point. An invoice totaling $90, terms n/30, was received by Arquette on June 8 from John Booth Transport Service for the freight cost. On June 12, the company received a check for the balance due from Arquette Company.
Instructions
(a)Prepare journal entries on the Bolton Company books to record all the events noted above under each of the following bases.
1. Sales and receivables are entered at gross selling price.2. Sales and receivables are entered at net of cash discounts.
(b)Prepare the journal entry under basis 2, assuming that Arquette Company did not remit payment until July 29.
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E7.7.(recording Bad Debts)Sandel Company reports the following financial information before adjustments.
Dr. Cr.
Accounts Receivable $160,000
Allowance for Doubtful Accounts $ 2,000
Sales Revenue (all on credit) 800,000
Sales Returns and Allowances 50,000
InstructionsPrepare the journal entry to record bad debt expense assuming Sandel Company estimates bad debts at (a) 1% of net sales and (b) 5% of accounts receivable.
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E7.13.(assigning Accounts Receivable)On April 1, 2012, Prince Company assigns $500,000 of its accounts receivable to the Third National Bank as collateral for a $300,000 loan due July 1, 2012. The assignment agreement calls for Prince 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).
Instructions
(a)Prepare the April 1, 2012, journal entry for Prince Company.(b)Prepare the journal entry for Prince's collection of $350,000 of the accounts receivable during the
period from April 1, 2012, through June 30, 2012.(c)On July 1, 2012, Prince paid Third National all that was due from the loan it secured on April 1,
2012. Prepare the journal entry to record this payment.
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E7.16.(transfer of Receivables With Recourse)Gringo Corporation factors $250,000 of accounts receivable with Winkler Financing, Inc. on a with recourse basis. Winkler Financing will collect the receivables. The receivables records are transferred to Winkler Financing on August 15, 2012. Winkler Financing assesses a finance charge of 2% of the amount of accounts receivable and also reserves an amount equal to 4% of accounts receivable to cover probable adjustments.
Instructions
(a)What conditions must be met for a transfer of receivables with recourse to be accounted for as a sale?
(b)Assume the conditions from part (a) are met. Prepare the journal entry on August 15, 2012, for Gringo to record the sale of receivables, assuming the recourse liability has a fair value of $3,000.
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E7.17.(transfer of Receivables Without Recourse)SEK Corp. factors $400,000 of accounts receivable with Mays Finance Corporation on a without recourse basis on July 1, 2012. The receivables records are transferred to Mays Finance, which will receive the collections. Mays Finance assesses a finance charge of of the amount of accounts receivable and retains an amount equal to 4% of accounts receivable to cover sales discounts, returns, and allowances. The transaction is to be recorded as a sale.
Instructions
(a)Prepare the journal entry on July 1, 2012, for SEK Corp. to record the sale of receivables without recourse.
(b)Prepare the journal entry on July 1, 2012, for Mays Finance Corporation to record the purchase of receivables without recourse.
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E7.18.(note Transactions At Unrealistic Interest Rates)On July 1, 2012, Rentoul Inc. made two sales.
1. It sold land having a fair value of $900,000 in exchange for a 4‐year zero‐interest‐bearing promissory note in the face amount of $1,416,163. The land is carried on Rentoul's books at a cost of $590,000.
2. It rendered services in exchange for a 3%, 8‐year promissory note having a face value of $400,000 (interest payable annually).
Rentoul Inc. recently had to pay 8% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 12% interest.
InstructionsRecord the two journal entries that should be recorded by Rentoul Inc. for the sales transactions above that took place on July 1, 2012.
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E7.19.(notes Receivable With Unrealistic Interest Rate)On December 31, 2011, Hurly Co. performed environmental consulting services for Cascade Co. Cascade was short of cash, and Hurly Co. agreed to accept a $300,000 zero‐interest‐bearing note due December 31, 2013, as payment in full. Cascade is somewhat of a credit risk and typically borrows funds at a rate of 10%. Hurly is much more creditworthy and has various lines of credit at 6%.
Instructions
(a)Prepare the journal entry to record the transaction of December 31, 2011, for the Hurly Co.(b)Assuming Hurly Co.'s fiscal year‐end is December 31, prepare the journal entry for December 31,
2012.(c)Assuming Hurly Co.'s fiscal year‐end is December 31, prepare the journal entry for December 31,
2013.(d)Assume that Hurly Co. elects the fair value option for this note. Prepare the journal entry at
December 31, 2012, if the fair value of the note is $295,000.
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E7.20.(analysis of Receivables)Presented below is information for Grant Company.
1. Beginning‐of‐the‐year Accounts Receivable balance was $15,000.2. Net sales (all on account) for the year were $100,000. Grant does not offer cash discounts.3. Collections on accounts receivable during the year were $80,000.
Instructions
(a)Prepare (summary) journal entries to record the items noted above.(b)Compute Grant's accounts receivable turnover ratio for the year. The company does not believe it
will have any bad debts.(c)Use the turnover ratio computed in (b) to analyze Grant's liquidity. The turnover ratio last year was
7.0.
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*E7.22.(petty Cash)McMann, Inc. decided to establish a petty cash fund to help ensure internal control over its small cash expenditures. The following information is available for the month of April.
1. On April 1, it established a petty cash fund in the amount of $200.2. A summary of the petty cash expenditures made by the petty cash custodian as of April 10 is
as follows.
Delivery charges paid on merchandise purchased $60
Supplies purchased and used 25
Postage expense 40
I.O.U. from employees 17
Miscellaneous expense 36
The petty cash fund was replenished on April 10. The balance in the fund was $12.3. The petty cash fund balance was increased $100 to $300 on April 20.
InstructionsPrepare the journal entries to record transactions related to petty cash for the month of April.
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*E7.24.(bank Reconciliation and Adjusting Entries)Kipling Company deposits all receipts and makes all payments by check. The following information is available from the cash records.
June 30 Bank Reconciliation
Balance per bank $ 7,000
Add: Deposits in transit 1,540
Deduct: Outstanding checks (2,000)
Balance per books $ 6,540
Month of July Results
Per Bank
Per Books
Balance July 31 $8,650 $9,250
July deposits 4,500 5,810
July checks 4,000 3,100
July note collected (not included in July deposits) 1,500 —
July bank service charge 15 —
July NSF check from a customer, returned by the bank (recorded by bank as a charge)
335 —
Instructions
(a)Prepare a bank reconciliation going from balance per bank and balance per book to correct cash balance.
(b)Prepare the general journal entry or entries to correct the Cash account.
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P7.1.(determine Proper Cash Balance)Francis Equipment Co. closes its books regularly on December 31, but at the end of 2012 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 2012.4. The amount shown as inventory was determined by physical count on December 31, 2012.
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
Receivables 42,000
Inventories 67,000
Accounts payable $45,000
Other current liabilities
14,200
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P7.2. (bad‐debt Reporting)Presented below are a series of unrelated situations.
1. Halen Company's unadjusted trial balance at December 31, 2012, included the following accounts.
Debit Credit
Allowance for doubtful accounts $4,000
Net sales $1,200,000
Halen Company estimates its bad debt expense to be of net sales. Determine its bad debt expense for 2012.
2. An analysis and aging of Stuart Corp. accounts receivable at December 31, 2012, 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, 2012?3. Shore Co. provides for doubtful accounts based on 3% of credit sales. The following data are
available for 2012.
Credit sales during 2012 $2,400,000
Allowance for doubtful accounts 1/1/12 17,000
Collection of accounts written off in prior years (customer credit was reestablished) 8,000
Customer accounts written off as uncollectible during 2012 30,000
What is the balance in Allowance for Doubtful Accounts at December 31, 2012?4. At the end of its first year of operations, December 31, 2012, Darden Inc. reported the following
information.
Accounts receivable, net of allowance for doubtful accounts $950,000
Customer accounts written off as uncollectible during 2012 24,000
Bad debt expense for 2012 84,000
What should be the balance in accounts receivable at December 31, 2012, before subtracting the allowance for doubtful accounts?
5. The following accounts were taken from Bullock Inc.'s trial balance at December 31, 2012.
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 2012.
Instructions
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Answer the questions relating to each of the five independent situations as requested.
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P7.3. (bad‐debt Reporting—aging)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 the 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.
Days Account Outstanding Amount Probability of Collection
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)
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P7.6.(journalize Various Accounts Receivable Transactions)The balance sheet of Starsky Company at December 31, 2012, includes the following.
Notes receivable $ 36,000
Accounts receivable 182,100
Less: Allowance for doubtful accounts 17,300 200,800
Transactions in 2012 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 2012.
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.
InstructionsPrepare all journal entries necessary to reflect the transactions above.
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P7.9.(notes Receivable Journal Entries)
On December 31, 2012, Oakbrook Inc. rendered services to Begin 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.
InstructionsPrepare 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, 2012.b. December 31, 2013.c. December 31, 2014.d. December 31, 2015.e. December 31, 2016.
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P7.11. (income Effects of Receivables Transactions)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, 2012, 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, 2012, 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.
2. On December 1, 2012, 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, 2012, 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, 2013.
InstructionsPrepare a schedule showing the income statement effects for the year ended December 31, 2012, as a result of the above facts.
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*P7.12.(petty Cash, Bank Reconciliation)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, 2012. 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, 2012, in the amount of $250.2. Expenditures from the fund by the custodian as of May 31, 2012, 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 57.45
Newspaper advertising 22.80
Miscellaneous expense 15.35
On May 31, 2012, 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 BankBank Statement
Disbursements Receipts Balance
Balance, May 1, 2012 $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, 2012 6,522
Nottleman's Cash Account
Balance, May 1, 2012 $ 8,850
Deposits during May 2012 31,000
Checks written during May 2012 (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, 2012, is $246.
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, 2012, proceeding to a correct cash balance, and
prepare the journal entries necessary to make the books correct and complete.
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(c)What amount of cash should be reported in the May 31, 2012, balance sheet?
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