The controller of the Red Wing Corporation is in the process of preparing the company’s 2011 financial
statements. She is trying to determine the correct balance of cash and cash equivalents to be reported
as a current asset in the balance sheet. The following items are being considered:
a. Balances in the company’s accounts at the First National Bank; checking $14,000, savings $20,600.
b. Undeposited customer checks of $5,400.
c. Currency and coins on hand of $590.
d. Savings account at the East Bay Bank with a balance of $370,000. This account is being used to
accumulate cash for future plant expansion (in 2013).
e. $20,000 in a checking account at the East Bay Bank. The balance in the account represents a 10%
compensating balance for a $200,000 loan with the bank. Red Wing may not withdraw the funds until
the loan is due in 2014.
f. U.S. Treasury bills; 2-month maturity bills totaling $11,000, and 7-month bills totaling $20,000.
Required:
(1) Determine the correct balance of cash and cash equivalents to be reported in the current asset
section of the 2011 balance sheet. (Omit the "$" sign in your response.)
Cash and cash equivalents includes:
$
Total
$
Tracy Company, a manufacturer of air conditioners, sold 100 units to Thomas Company on November
17, 2011. The units have a list price of $600 each, but Thomas was given a 30% trade discount. The
terms of the sale were 2/10, n/30.
Required:
(1) Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection
on November 26, 2011, assuming that the gross method of accounting for cash discounts is
used. (Omit the "$" sign in your response.)
Date
Nov. 17, 2011
General journal
Debit
Credit
(Click to select)
(Click to select)
Nov. 26, 2011
(Click to select)
(2) Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection
on December 15, 2011, assuming that the gross method of accounting for cash discounts is
used. (Omit the "$" sign in your response.)
Date
Nov. 17, 2011
General journal
Debit
Credit
(Click to select)
(Click to select)
Dec. 15, 2011
(Click to select)
(Click to select)
(3) Repeat requirements 1 and 2 assuming that the net method of accounting for cash discounts is
used.(Omit the "$" sign in your response.)
Date
Nov. 17, 2011
General journal
(Click to select)
(Click to select)
Nov. 26, 2011
(Click to select)
(Click to select)
Nov. 17, 2011
(Click to select)
(Click to select)
Dec. 15, 2011
(Click to select)
Debit
Credit
Johnson Company uses the allowance method to account for uncollectible accounts receivable. Bad
debt expense is established as a percentage of credit sales. For 2011, net credit sales totaled
$4,510,000, and the estimated bad debt percentage is 1%. The allowance for uncollectible accounts had
a credit balance of $42,600 at the beginning of 2011 and $39,000, after adjusting entries, at the end of
2011.
Required:
(1) What is bad debt expense for 2011? (Omit the "$" sign in your response.)
Bad debt expense for 2011
$
(2) Determine the amount of accounts receivable written off during 2011. (Omit the "$" sign in your
response.)
Accounts receivable written
off
$
(3) If the company uses the direct write-off method, what would bad debt expense be for 2011? (Omit
the "$" sign in your response.)
Bad debt expense for 2011
$
On June 30, 2011, the Esquire Company sold some merchandise to a customer for $40,000. In payment,
Esquire agreed to accept a 8% note requiring the payment of interest and principal on March 31, 2012.
The 8% rate is appropriate in this situation.
Required:
(1) Prepare journal entries to record the sale of merchandise (omit any entry that might be required for
the cost of the goods sold), the December 31, 2011 interest accrual, and the March 31, 2012
collection.(Omit the "$" sign in your response.)
Date
June 30, 2011
General journal
Debit
Credit
(Click to select)
(Click to select)
Dec. 31, 2011
(Click to select)
(Click to select)
Mar. 31, 2012
(Click to select)
(2) If the December 31 adjusting entry for the interest accrual is not prepared, by how much will income
before income taxes be over- or understated in 2011 and 2012? (Input all amounts as positive
values. Omit the "$" sign in your response.)
2011 income before income taxes would be
(Click to select)
by$
2012 income before income taxes would be
(Click to select)
by$
Listed below are several terms and phrases associated with cash and receivables. Pair each item from
List A (by letter) with the item from List B that is most appropriately associated with it.
List A
List B
(Click to select)
1. Internal control
a. Restriction on cash.
(Click to select)
2. Trade discount
b.
(Click to select)
3. Cash equivalents
c. Includes separation of duties.
(Click to select)
4. Allowance for uncollectibles d. Bad debt expense a % of credit sales.
(Click to select)
5. Cash discount
e. Recognizes bad debts as they occur.
(Click to select)
6. Balance sheet approach
f. Sale of receivables to as financial
institution.
(Click to select)
7. Income statement approach g. Include highly liquid investments.
(Click to select)
8. Net method
h. Estimate of bad debts.
(Click to select)
9. Compensating balance
i. Reduction in amount paid by credit
customer.
(Click to select)
10. Discounting
(Click to select)
11. Gross method
(Click to select)
12. Direct write-off method
(Click to select)
13. Factoring
Cash discount not taken is sales
revenue.
j. Reduction below list price.
k. Cash discount not taken is interest
revenue.
l. Bad debt expense determined by
estimating realizable value.
m. Sale of note receivable to a financial
institution.
Swathmore Clothing Corporation grants its customers 30 days’ credit. The company uses the allowance
method for its uncollectible accounts receivable. During the year, a monthly bad debt accrual is made by
multiplying 2% times the amount of credit sales for the month. At the fiscal year-end of December 31, an
aging of accounts receivable schedule is prepared and the allowance for uncollectible accounts is
adjusted accordingly.
At the end of 2010, accounts receivable were $536,000 and the allowance account had a credit
balance of $53,000. Accounts receivable activity for 2011 was as follows:
Beginning
balance
Credit sales
Collections
Write-offs
$
536,000
2,780,000
(2,623,000)
(57,000)
Ending balance
$
636,000
The company’s controller prepared the following aging summary of year-end accounts receivable:
Summary
Age Group
0–60 days
61–90
days
91–120
days
Over 120
days
Total
Percent
Uncollectible
426,120
4%
Amount
$
$
95,400
15
69,960
25
44,520
40
636,000
Required:
(1) Prepare a summary journal entry to record the monthly bad debt accrual and the write-offs during the
year. (Omit the "$" sign in your response.)
General Journal
Monthly bad debt expense accrual summary.
Debit
Credit
(Click to select)
(Click to select)
To record year 2011 accounts receivable write-offs.
(Click to select)
(Click to select)
(2) Prepare the necessary year-end adjusting entry for bad debt expense. (Round your intermediate
and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
General Journal
Debit
Credit
(Click to select)
(Click to select)
(3-a) What is total bad debt expense for 2011? (Round your intermediate and final answers to the
nearest dollar amount. Omit the "$" sign in your response.)
Bad debt expense
$
(3-b) How would accounts receivable appear in the 2011 balance sheet? (Round your intermediate
and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
Balance sheet
Current assets:
Accounts receivable
$
Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of
June 2011, the company had accounts receivable of $780,000. Lonergan needs approximately $500,000
to capitalize on a unique investment opportunity. On July 1, 2011, a local bank offers Lonergan the
following two alternatives:
a. Borrow $500,000, sign a note payable, and assign the entire receivable balance as collateral. At the
end of each month, a remittance will be made to the bank that equals the amount of receivables
collected plus 12% interest on the unpaid balance of the note at the beginning of the period.
b. Transfer $550,000 of specific receivables to the bank without recourse. The bank will charge a 2%
finance charge on the amount of receivables transferred. The bank will collect the receivables directly
from customers. The sale criteria are met.
Required:
(1) Prepare the journal entries that would be recorded on July 1 for each of the alternatives. (Omit the
"$" sign in your response.)
Alternative a:
Date
July 1, 2011
General Journal
Debit
Credit
General Journal
Debit
Credit
(Click to select)
(Click to select)
Alternative b:
Date
July 1, 2011
(Click to select)
(2) Assuming that 80% of all June 30 receivables are collected during July, prepare the necessary journal
entries to record the collection and the remittance to the bank. (Omit the "$" sign in your
response.)
Alternative a:
Date
July, 2011
General Journal
(Click to select)
(Click to select)
July 31, 2011
(Click to select)
Alternative b:
Debit
Credit
Date
July 31, 2011
General Journal
(Click to select)
(Click to select)
Debit
Credit
Evergreen Company sells lawn and garden products to wholesalers. The company’s fiscal year-end is
December 31. During 2011, the following transactions related to receivables occurred:
Feb. 28 Sold merchandise to Lennox, Inc. for $10,000 and accepted a 10%, 7-month note. 10% is
an
appropriate rate for this type of note.
Mar. 31 Sold merchandise to Maddox Co. and accepted a noninterest-bearing note with a discount
rate of 10%. The $8,000 payment is due on March 31, 2012.
Apr. 3 Sold merchandise to Carr Co. for $7,000 with terms 2/10, n/30. Evergreen uses the gross
method to account for cash discounts.
11 Collected the entire amount due from Carr Co.
17 A customer returned merchandise costing $3,200. Evergreen reduced the customer’s
receivable balance by $5,000, the sales price of the merchandise. Sales returns are
recorded
by the company as they occur.
30 Transferred receivables of $50,000 to a factor without recourse. The factor charged
Evergreen a 1% finance charge on the receivables transferred. The sale criteria are met.
June 30 Discounted the Lennox, Inc., note at the bank. The bank’s discount rate is 12%. The note
was discounted without recourse.
Aug. 31 Lennox, Inc., paid the note amount plus interest to the bank.
Required:
(1) Prepare the necessary journal entries for Evergreen for each of the above dates. For transactions
involving the sale of merchandise, ignore the entry for the cost of goods sold. (In cases where no
entry is required, please select the option "No journal entry required" for your answer to grade
correctly. Leave no cells blank - be certain to enter "0" wherever required. Round your
answers to the nearest dollar amount. Omit the "$" sign in your response.)
Date
Feb. 28, 2011
General Journal
(Click to select)
(Click to select)
Mar. 31, 2011
(Click to select)
April 3, 2011
(Click to select)
(Click to select)
April 11, 2011
(Click to select)
April 17, 2011
(Click to select)
(Click to select)
Debit
Credit
(Click to select)
(Click to select)
April 30, 2011
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June 30, 2011
(Click to select)
(Click to select)
June 30, 2011
Aug. 31, 2011
(Click to select)
(Click to select)
(2) Prepare any necessary adjusting entries at December 31, 2011. Adjusting entries are only recorded
at year end. (Omit the "$" sign in your response.)
General Journal
Debit
Credit
(Click to select)
(Click to select)
(3) Prepare a schedule showing the effect of the journal entries in requirements 1 and 2 on 2011 income
before taxes. (Decrease amounts should be indicated with a minus sign. Omit the "$" sign in
your response.)
Date
February
28
Income
Increase or Decrease
(Click to select)
March 31
(Click to select)
April 3
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April 11
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April 17
(Click to select)
April 17
(Click to select)
Amounts
$
April 30
(Click to select)
June 30
(Click to select)
June 30
(Click to select)
December
31
Total
effect
(Click to select)
$