SOLUTIONS
EXERCISE 7-4 (10-15 minutes)
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Computation of cost of goods sold: |
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Merchandise
purchased |
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$320,000 |
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Less: Ending inventory |
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90,000 |
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Cost of goods sold |
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$230,000 |
Selling price = 1.4 (Cost of good sold)
= 1.4 ($230,000)
= $322,000
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Sales on account |
$322,000 |
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Less collections |
198,000 |
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Uncollected balance |
124,000 |
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Balance per ledger |
82,000 |
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Apparent shortage |
$
42,000 |
—Enough for a new car |
EXERCISE 7-7
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(a) |
Bad Debt Expense.......................................................... |
8,500 |
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Allowance
for Doubtful Accounts........................ |
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8,500* |
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*.01 X ($900,000 – $50,000) = $8,500 |
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(b) |
Bad Debt Expense.......................................................... |
3,000 |
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Allowance
for Doubtful Accounts........................ |
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3,000* |
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*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
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(a) |
Bad Debt Expense.............................................................. |
5,350 |
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Allowance
for Doubtful Accounts............................ |
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5,350 |
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[($90,000 X 4%) + $1,750] |
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(b) |
Bad Debt Expense.............................................................. |
6,800 |
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Allowance
for Doubtful Accounts............................ |
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6,800 |
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($680,000 X 1%) |
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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
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(a) |
Cash ............................................................................................. |
192,000 |
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Finance Charge............................................................................... |
8,000* |
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Notes
Payable...................................................................... |
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200,000 |
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*2% X $400,000 = $8,000 |
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(b) |
Cash ............................................................................................. |
350,000 |
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Accounts
Receivable........................................................... |
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350,000 |
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(c) |
Notes Payable......................................................................... |
200,000 |
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Interest Expense..................................................................... |
5,000* |
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Cash............................................................................ |
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205,000 |
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*10% X $200,000 3/12 = $5,000 |
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EXERCISE 7-21
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(a) |
Cash
[$25,000 X (1 – .09)]...................................................... |
22,750 |
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Due from
Factor.................................................................... |
1,250 |
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Loss on Sale
of Accounts Receivable.................................. |
2,200* |
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Accounts Receivable................................................ |
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25,000 |
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Recourse Obligation................................................. |
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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.
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PROBLEM 7-2 |
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1. |
Net
Sales |
$1,500,000 |
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Percentage |
1 1/2% |
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Bad debt expense |
$
22,500 |
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2. |
Accounts
receivable |
$1,750,000 |
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Amounts
estimated to be uncollectible |
(180,000) |
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Net realizable value |
$1,570,000 |
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3. |
Allowance
for doubtful accounts 1/1/03 |
$17,000 |
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Establishment
of accounts written off in prior years |
8,000 |
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Customer
accounts written off in 2003 |
(30,000) |
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Bad
debt expense for 2003 ($2,100,000 X 3%) |
63,000 |
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Allowance for doubtful accounts
12/31/03 |
$58,000 |
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4. |
Bad
debt expense for 2003 |
$84,000 |
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Customer
accounts written off as uncollectible during 2003 |
(24,000) |
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Allowance for doubtful accounts
balance 12/31/03 |
$60,000 |
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Accounts
receivable, net of allowance for doubtful accounts |
$ 950,000 |
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Allowance
for doubtful accounts balance 12/31/03 |
60,000 |
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Accounts receivable, before deducting
allowance for |
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5. |
Accounts
receivable |
$410,000 |
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Percentage |
3% |
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Bad
debt expense, before adjustment |
12,300 |
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Allowance
for doubtful accounts (debit balance) |
14,000 |
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Bad debt expense, as adjusted |
$
26,300 |
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PROBLEM 7-10 |
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(a) Connecticut
Inc. |
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Long-Term
Receivables Section of Balance Sheet |
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December
31, 2004 |
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9%
note receivable from sale of division, |
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due in annual installments of $600,000 to |
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May 1, 2006, less current installment |
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$600,000 |
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(1) |
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8%
note receivable from officer, due Dec. 31, |
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2006, collateralized by 10,000 shares of |
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Connecticut, Inc., common stock with a |
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fair value of $450,000 |
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400,000 |
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Noninterest-bearing
note from sale of patent, |
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net of 12% imputed interest, due April 1, |
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2006 |
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173,746 |
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(2) |
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Installment
contract receivable, due in |
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annual installments of $45,125 to July 1, |
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2008, less current installment |
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110,275 |
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(3) |
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Total long-term receivables |
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$1,284,021 |
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(b) Connecticut Inc. |
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Selected
Balance Sheet Balances |
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December
31, 2004 |
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Current
portion of long-term receivables: |
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Note
receivable from sale of division |
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$600,000 |
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(1) |
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Installment
contract receivable |
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29,725 |
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(3) |
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Total current portion of long-term
receivables |
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$629,725 |
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Accrued
interest receivable: |
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Note
receivable from sale of division |
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72,000 |
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(4) |
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Installment
contract receivable |
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7,700 |
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(5) |
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Total accrued interest receivable |
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$79,700 |
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(c) Connecticut
Inc. |
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Interest Revenue from Long-Term
Receivables |
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For the Year Ended December 31, 2004 |
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Interest income: |
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Note receivable from sale of division |
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$126,000 |
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(6) |
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Note receivable from sale of patent |
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14,346 |
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(2) |
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Note receivable from officer |
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32,000 |
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(7) |
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Installment contract receivable from
sale of land |
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7,700 |
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(5) |
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Total interest income for year ended 12/31/04 |
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$180,046 |
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Explanation
of Amounts
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(1) |
Long-term Portion of 9% Note
Receivable at 12/31/04 |
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Face
amount, 5/1/03 |
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$1,800,000 |
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Less
installment received 5/1/04 |
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600,000 |
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Balance,
12/31/04 |
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1,200,000 |
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Less
installment due 5/1/05 |
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600,000 |
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Long-term
portion, 12/31/04 |
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$
600,000 |
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(2) |
Noninterest-bearing Note, Net of
Imputed Interest |
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at 12/31/04 |
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Face
amount 4/1/04 |
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$
200,000 |
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Less
imputed interest |
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[$200,000 – ($200,000 X 0.797)] |
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40,600 |
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Balance,
4/1/04 |
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159,400 |
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Add
interest earned to 12/31/04 |
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($159,400 X 12% X 9/12) |
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14,346 |
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Balance,
12/31/04 |
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$
173,746 |
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(3) |
Long-term Portion of Installment
Contract |
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Receivable at 12/31/04 |
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Contract
selling price, 7/1/04 |
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$
200,000 |
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Less
down payment, 7/1/04 |
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60,000 |
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Balance,
12/31/04 |
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140,000 |
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Less
installment due, 7/1/05 |
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[$45,125 – ($140,000 X 11%)] |
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29,725 |
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Long-term
portion, 12/31/04 |
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$
110,275 |
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(4) |
Accrued Interest—Note Receivable,
Sale of |
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Division at 12/31/04 |
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Interest
accrued from 5/1 to 12/31/04 |
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($1,200,000 X 9% X 8/12) |
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$
72,000 |
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(5) |
Accrued Interest—Installment Contract
at 12/31/04 |
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Interest
accrued from 7/1 to 12/31/04 |
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($140,000 X 11% X 1/2) |
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$ 7,700 |
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(6) |
Interest Revenue—Note Receivable,
Sale of |
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Division, for 2004 |
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Interest
earned from 1/1 to 5/1/2004 |
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($1,800,000 X 9% X 4/12) |
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$
54,000 |
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Interest
earned from 5/1 to 12/31/04 |
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($1,200,000 X 9% X 8/12) |
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72,000 |
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Interest
income |
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$
126,000 |
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(7) |
Interest Revenue—Note Receivable,
Officer, for 2004 |
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Interest
earned 1/1/ to 12/31/04 |
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($400,000 X 8%) |
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$
32,000 |
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PROBLEM 7-11 |
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Radisson Company |
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INCOME STATEMENT EFFECT |
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For the year ended December 31, 2003 |
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Expenses resulting from accounts
receivable |
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assigned (Schedule 1) |
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$22,920 |
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Loss resulting from accounts receivable
sold |
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($300,000 – $250,000) |
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50,000 |
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Total expenses |
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$72,920 |
Schedule 1
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Computation of Expense |
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for Accounts Receivable Assigned |
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Assignment expense: |
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Accounts receivable assigned |
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$400,000 |
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X
85% |
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Advance by Stickum Finance Company |
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340,000 |
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X 3% |
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$10,200 |
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Interest expense |
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12,720 |
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Total expenses |
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$22,920 |