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SOLUTIONS

 

EXERCISE 7-4 (10-15 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

 

EXERCISE 7-7

 

(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*

 

 

 

 

 

*Step 1:           .05 X $100,000 = $5,000 (desired credit balance in Allowance account)

Step 2:             $5,000 – $2,000 = $3,000 (required credit entry to bring allowance account to $5,000 credit balance)

 

EXERCISE 7-9

 

(a)

Bad Debt Expense..............................................................

5,350

 

 

            Allowance for Doubtful Accounts............................

 

5,350

 

                [($90,000 X 4%) + $1,750]

 

 

 

 

 

 

(b)

Bad Debt Expense..............................................................

6,800

 

 

            Allowance for Doubtful Accounts............................

 

6,800

 

                ($680,000 X 1%)

 

 

 

EXERCISE 7-10

 

(a)               The direct write-off approach is not theoretically justifiable even though required for income tax purposes. Direct write-off does not match expenses with revenues of the period, nor does it result in receivables being stated at estimated realizable value on the balance sheet.

 

(b)        Bad Debt Expense – 2% of Sales = $44,000 ($2,200,000 X 2%)

            Bad Debt Expense – Direct Write-Off = $31,330 ($7,800 + $6,700 +

               $7,000 + $9,830)

Net income would be $12,670 ($44,000 – $31,330) lower under the percentage-of-sales approach.

 

EXERCISE 7-13

 

(a)

Cash                                                                                                 .............................................................................................

192,000

 

 

Finance Charge...............................................................................

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 3/12 = $5,000

 

 

 

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................................................

 

25,000

 

            Recourse Obligation.................................................

 

1,200

 

*($25,000 X .04) + $1,200

 

(b)        Accounts Receivable Turnover          = Sales ¸ Average Receivables

                                                                                    = $185,000 ¸ ($15,000 + $20,000*)/2

                                                                                    = 10.57 times (or about 35 days)

 

*($15,000 + $100,000 – $70,000 – $25,000)

 

With the factoring transaction, Jones Company’s turnover ratio still declines but by less than in the earlier example. While Jones’ collections have slowed, by factoring the receivables, Jones is able to convert them to cash. The cost of this approach to converting receivables to cash is captured in the Loss on the Sale of Accounts Receivable account.

 

 

PROBLEM 7-2

 

 

1.

Net Sales

$1,500,000

 

Percentage

          1 1/2%

 

Bad debt expense

$     22,500

 

 

 

2.

Accounts receivable

$1,750,000

 

Amounts estimated to be uncollectible

   (180,000)

 

Net realizable value

$1,570,000

 

 

 

3.

Allowance for doubtful accounts 1/1/03

$17,000

 

Establishment of accounts written off in prior years

8,000

 

Customer accounts written off in 2003

(30,000)

 

Bad debt expense for 2003 ($2,100,000 X 3%)

  63,000

 

Allowance for doubtful accounts 12/31/03

$58,000

 

 

 

4.

Bad debt expense for 2003

$84,000

 

Customer accounts written off as uncollectible during

   2003

 

 (24,000)

 

Allowance for doubtful accounts balance 12/31/03

$60,000

 

 

 

 

Accounts receivable, net of allowance for doubtful

   accounts

 

$   950,000

 

Allowance for doubtful accounts balance 12/31/03

       60,000

 

Accounts receivable, before deducting allowance for
   doubtful accounts


$1,010,000

 

 

 

5.

Accounts receivable

$410,000

 

Percentage

             3%

 

Bad debt expense, before adjustment

12,300

 

Allowance for doubtful accounts (debit balance)

    14,000

 

Bad debt expense, as adjusted

$  26,300

 

 

 

PROBLEM 7-10

 

 

(a)                                                                  Connecticut Inc.

Long-Term Receivables Section of Balance Sheet

December 31, 2004

9% note receivable from sale of division,

 

 

 

 

   due in annual installments of $600,000 to

 

 

 

 

   May 1, 2006, less current installment

 

$600,000

 

(1)

8% note receivable from officer, due Dec. 31,

 

 

 

 

   2006, collateralized by 10,000 shares of

 

 

 

 

   Connecticut, Inc., common stock with a

 

 

 

 

   fair value of $450,000

 

400,000

 

 

Noninterest-bearing note from sale of patent,

 

 

 

 

   net of 12% imputed interest, due April 1,

 

 

 

 

   2006

 

173,746

 

(2)

Installment contract receivable, due in

 

 

 

 

   annual installments of $45,125 to July 1,

 

 

 

 

   2008, less current installment

 

     110,275

 

(3)

      Total long-term receivables

 

$1,284,021

 

 

 

(b)                                          Connecticut Inc.

Selected Balance Sheet Balances

December 31, 2004

Current portion of long-term receivables:

 

 

 

 

Note receivable from sale of division

 

$600,000

 

(1)

Installment contract receivable

 

    29,725

 

(3)

      Total current portion of long-term receivables

 

$629,725

 

 

 

 

 

 

 

Accrued interest receivable:

 

 

 

 

Note receivable from sale of division

 

72,000

 

(4)

Installment contract receivable

 

    7,700

 

(5)

      Total accrued interest receivable

 

$79,700

 

 

 

 

 

(c)                                                                  Connecticut Inc.

Interest Revenue from Long-Term Receivables

For the Year Ended December 31, 2004

Interest income:

 

 

 

 

Note receivable from sale of division

 

$126,000

 

(6)

Note receivable from sale of patent

 

14,346

 

(2)

Note receivable from officer

 

32,000

 

(7)

Installment contract receivable from sale of land

 

      7,700

 

(5)

      Total interest income for year ended 12/31/04

 

$180,046

 

 

 

Explanation of Amounts

 

(1)

Long-term Portion of 9% Note Receivable at 12/31/04

 

 

 

            Face amount, 5/1/03

 

$1,800,000

 

            Less installment received 5/1/04

 

    600,000

 

            Balance, 12/31/04

 

1,200,000

 

            Less installment due 5/1/05

 

     600,000

 

            Long-term portion, 12/31/04

 

$   600,000

 

 

 

 

(2)

Noninterest-bearing Note, Net of Imputed Interest

 

 

 

   at 12/31/04

 

 

 

            Face amount 4/1/04

 

$   200,000

 

            Less imputed interest

 

 

 

               [$200,000 – ($200,000 X 0.797)]

 

      40,600

 

            Balance, 4/1/04

 

159,400

 

            Add interest earned to 12/31/04

 

 

 

               ($159,400 X 12% X 9/12)

 

      14,346

 

            Balance, 12/31/04

 

$   173,746

 

 

 

 (3)

Long-term Portion of Installment Contract

 

 

 

   Receivable at 12/31/04

 

 

 

            Contract selling price, 7/1/04

 

$   200,000

 

            Less down payment, 7/1/04

 

      60,000

 

            Balance, 12/31/04

 

140,000

 

            Less installment due, 7/1/05

 

 

 

               [$45,125 – ($140,000 X 11%)]

 

      29,725

 

            Long-term portion, 12/31/04

 

$   110,275

 

 

 

 

(4)

Accrued Interest—Note Receivable, Sale of

 

 

 

   Division at 12/31/04

 

 

 

            Interest accrued from 5/1 to 12/31/04

 

 

 

               ($1,200,000 X 9% X 8/12)

 

$    72,000

 

 

 

 

(5)

Accrued Interest—Installment Contract at 12/31/04

 

 

 

            Interest accrued from 7/1 to 12/31/04

 

 

 

               ($140,000 X 11% X 1/2)

 

$      7,700

 

 

 

 

(6)

Interest Revenue—Note Receivable, Sale of

 

 

 

   Division, for 2004

 

 

 

            Interest earned from 1/1 to 5/1/2004

 

 

 

               ($1,800,000 X 9% X 4/12)

 

$    54,000

 

            Interest earned from 5/1 to 12/31/04

 

 

 

               ($1,200,000 X 9% X 8/12)

 

      72,000

 

            Interest income

 

$  126,000

 

 

 

 

(7)

Interest Revenue—Note Receivable, Officer, for 2004

 

 

 

            Interest earned 1/1/ to 12/31/04

 

 

 

               ($400,000 X 8%)

 

$    32,000

 

 

PROBLEM 7-11

 

 

Radisson Company

INCOME STATEMENT EFFECT

For the year ended December 31, 2003

Expenses resulting from accounts receivable

 

 

 

 

   assigned (Schedule 1)

 

 

 

$22,920

Loss resulting from accounts receivable sold

 

 

 

 

   ($300,000 – $250,000)

 

 

 

  50,000

      Total expenses

 

 

 

$72,920

 

Schedule 1

Computation of Expense

for Accounts Receivable Assigned

Assignment expense:

 

 

 

 

      Accounts receivable assigned

 

$400,000

 

 

 

 

X     85%

 

 

      Advance by Stickum Finance Company

 

340,000

 

 

 

 

X       3%

 

$10,200

Interest expense

 

 

 

  12,720

      Total expenses

 

 

 

$22,920