Question # 1
Assiniboia Co. uses the percentage of sales approach to record bad debts expense for its monthly financial statements and the
percentage of receivables approach for its year-end financial statements. Assiniboia Co. has a May 31 fiscal year end, closes
temporary accounts annually, and uses the periodic inventory system.
On March 31, 2008, after completing its month-end adjustments, it had accounts receivable of $892,500, a credit balance of
$47,750 in Allowance for Doubtful Accounts, and a debit balance in Bad Debts Expense of $115,880. In April and May, the
following occurred:
April
1. Sold $646,900 of merchandise on credit.
2. Accepted $10,900 of returns on the merchandise sold on credit. These customers were issued credit memos.
3. Collected $696,250 cash on account from customers.
4. Interest charges of $13,860 were charged to outstanding accounts receivable.
5. As part of the month-end adjusting entries, recorded bad debts expense of 3% of net credit sales for the month.
May
1. Credit sales were $763,600.
2. Received $4,450 cash from a customer whose account had been written off in March.
3. Collected $785,240 cash, in addition to the cash collected in (2) above, from customers on account.
4. Wrote off $69,580 of accounts receivable as uncollectible.
5. Interest charges of $12,070 were charged to outstanding accounts receivable.
6. Recorded the year-end adjustment for bad debts. Uncollectible accounts were estimated to be 6% of accounts
receivable.
Instructions
(a) Record the above transactions and adjustments.
(b) Show how accounts receivable will appear on the May 31, 2008, balance sheet.
(c) What amount will be reported as bad debts expense on the income statement for the year ended May 31, 2008?
(d) Where are bad debts expense and interest revenue shown on the income statement?
Solution:
(a)
April
1.
Accounts Receivable ..................................................
646,900
Sales ......................................................................
2.
Sales Returns and Allowances ..................................
646,900
10,900
Accounts Receivable ...........................................
3.
Cash ............................................................................
10,900
696,250
Accounts Receivable ...........................................
4. Accounts Receivable ......................................................
696,250
13,860
Interest Revenue..................................................
13,860
5. Bad Debts Expense ........................................................
19,080
Allowance for Doubtful Accounts......................
19,080
[($646,900 - $10,900) x 3%]
May
1.
Accounts Receivable ..................................................
763,600
Sales ......................................................................
2.
763,600
Accounts Receivable ..................................................
4,450
Allowance for Doubtful Accounts ......................
4,450
Cash ............................................................................
4,450
Accounts Receivable ...........................................
3.
Cash ............................................................................
Accounts Receivable ...........................................
4,450
785,240
785,240
4.
Allowance for Doubtful Accounts ............................
69,580
Accounts Receivable ...........................................
5. Accounts receivable .......................................................
69,580
12,070
Interest revenue...................................................
6.
12,070
Bad debts expense ......................................................
44,318
Allowance for Doubtful Accounts ......................
44,318
[($766,960 x 6%) - $1,700]
Date
Explanation
April
1.
2.
3.
4.
May
Opening Balance
Sales
Returns
Collections
Interest charges
1.
Sales
2.
Recovery
2.
Collection recovery
3.
Accounts Receivable
Debit
Ref.
Credit

Balance
13,860
892,500
1,539,400
1,528,500
832,250
846,110
763,600
1,609,710
4,450
1,614,160
646,900
10,900
696,250
4,450
1,609,710
Collections
785,240
824,470
4.
Write-offs
69,580
754,890
5.
Interest charges
Date
12,070
Allowance for Doubtful Accounts
Explanation
Debit
Ref.
766,960
Credit

Balance
April
Opening Balance
47,750
5.
Bad debts expense
19,080
66,830
May
2.
4.
6.
Recovery
Write-offs
Bad debts expense
4,450
71,280
1,700
46,018
69,580
44,318
(b)
(c)
Accounts Receivable ...................................................................................
Less: Allowance for Doubtful Accounts ...................................................
$766,960
46,018
Net Accounts Receivable ............................................................................
$720,942
Bad debts expense
(d)
Balance March 31 ........................................................................................
April entry .....................................................................................................
May entry ....................................................................................................
$115,880
19,080
44,318
Total expense for the year ..........................................................................
$179,278
Bad debts expense is included as an operating expense on the income statement. Interest revenue is
included in Other Revenue on the income statement.
Question # 2
On January 1, 2007, Vu Co. had accounts receivable of $146,000, notes receivable of $12,000, interest receivable of
$100, and allowance for doubtful accounts of $13,200. The note receivable was a 5-month, 5% note receivable from
Annabelle Company dated October 31, 2006; the correct interest has been accrued. Vu Co. prepares financial statements
annually for the year ended December 31. Assume interest is due at maturity unless otherwise specified. In the year, the
following selected transactions occurred:
Jan. 2. Sold $16,000 of merchandise to George Company, terms 2/10, n/30.
Feb. 1 Accepted George Company's $16,000, 3-month, 6.5% note for the balance due (see January 2 transaction).
Mar. 31 Received payment in full from Annabelle Company for the amount due.
May 1 Collected George Company note in full (see February 1 transaction).
25 Accepted Avery Inc.'s $6,000, 3-month, 6% note in settlement of a past-due balance on account. Interest is
payable monthly.
June 25 Received one month's interest from Avery Inc. on its note (see May 25 transaction).
July 25 The Avery Inc. note was dishonoured (see May 25 transaction). Avery Inc. is bankrupt and future payment
is not expected.
Sept. 1 Sold $10,000 of merchandise to Young Company and accepted a $10,000, 6-month, 5.25% note for the
amount due.
Nov. 22 News reports indicate that several key officers of Young Company have been arrested on charges of fraud
and embezzlement, and that the company's operations have been shut down indefinitely (see September 1
transaction).
30 Gave MRC Corp a $5,000 cash loan and accepted MRC's 4-month, 4.5% note.
Dec. 31 Accrued interest is recorded on any outstanding notes at year end.
Instructions
(a) Record the above transactions.
(b) If there have been no further reports on the situation regarding Young Company, do you think the note should
be written off? If not, do you think interest should be accrued on the note receivable at year end?
Solution:
(a)
Jan.
2
Accounts Receivable—George .............................
16,000
Sales ..................................................................
Feb.
1
Notes Receivable—George ...................................
16,000
16,000
Accounts Receivable—George .......................
Mar.
31
Cash [$12,000 + $150 + 100] .................................
16,000
12,250
Notes Receivable—Annabelle ........................
May
1
12,000
Interest Revenue [$12,000 x 5% x 3/12] ........
150
Interest Receivable [$12,000 x 5% x 2/12] ....
100
Cash [$16,000 + $260] ...........................................
16,260
Notes Receivable—George .............................
16,000
Interest Revenue..............................................
260
[$16,000 x 6.5% x 3/12]
25
Notes Receivable—Avery .....................................
6,000
Accounts Receivable—Avery .........................
June
25
Cash ........................................................................
6,000
30
Interest Revenue..............................................
30
[$6,000 x 6% x 1/12]
July
25
Allowance for doubtful accounts .........................
6,000
Notes Receivable-Avery ..................................
Sept. 1
Notes receivable—Young .....................................
Sales ..................................................................
6,000
10,000
10,000
Nov.
22
There would probably be no entry made on November 22. Vu Company would likely start
investigating the facts of this situation in an attempt to determine whether the note will be
collectible or not.
Nov.
30
Notes Receivable—MRC ......................................
5,000
Cash ..................................................................
Dec.
31
Interest Receivable—MRC ..................................
5,000
19
Interest Revenue..............................................
19
[$5,000 x 4.5% x 1/12]
31
Interest Receivable—Young ................................
175
Interest Revenue ................................................
[$10,000 x 5.25% x 4/12]
175
The company would evaluate the information available on Young Company and may
decide to write-off the note and not accrue the interest. If they decide that a write-off is
appropriate, the above entry would not be made and the following entry would be made:
Dec.
31
Allowance for Doubtful Accounts........................
Notes Receivable—Young .................................
(b)
10,000
10,000
Consideration would have to be given as to whether the note should be written off. At the very
least, an allowance should be created with respect to the Young Company note, based upon the
estimated probability of collection. Interest should not be accrued if it is unlikely to be collected.
Question 3:
On July 31, 2008, the company’s year end, Diamond Drills had account balances as follows:
Accounts receivable ............................................................................... $ 340,500
Allowance for doubtful accounts (credit balance) ......................................... 5,200
The credit department has determined that of the total accounts receivable, $5,900 should be written off. Diamond estimates 95% of
remaining accounts receivable will be collected.
Instructions:
(a)
Prepare the entry to write off the accounts as determined by the credit department
(b)
Calculate the net realizable value of accounts receivable.
(c)
Prepare the entry required to adjust accounts receivable to their net realizable balance.
Solution
(a)
Allowance for Doubtful Accounts ............................................................................... 5,900
Accounts Receivable .............................................................................................. .......... 5,900
(b)
Net realizable value = ($340,000 – 5,900) x 95% = $317,395
(c)
Ending Allowance for Doubtful Accounts required is
Accounts receivable ($340,000 – 5,900) .................................. $ 334,100
Net realizable value ..................................................................... 317,395
Correct allowance for Doubtful Accounts ................................... 16,705 ... Credit
Unadjusted balance ($5,200 – 5,900) ........................................
700 .... Debit
Entry required ............................................................................. $ 17,405 ... Credit
Bad Debts Expense
........................................................................................ 17,405
Allowance for Doubtful Accounts .......................................................................... ........ 17,405
Question 4:
The percentage of sales approach to estimating uncollectible accounts expense is used by Kerry Company. On March 31,
the firm had accounts receivable of $437,000 and the Allowance for Doubtful Accounts had a credit balance of $2,140
before adjustment. Net credit sales for March amounted to $5,000,000. The credit manager estimated that uncollectible
accounts expense would amount to 1/4 of 1% of net credit sales made during March. On April 10, an accounts receivable
from Karen Sully for $6,100 was determined to be uncollectible and written off. However, on April 30, Sully received an
inheritance and immediately paid her past due account in full.
(a) Prepare the journal entries made by Kerry Company on the following dates:
1. March 31
2. April 10
3. April 30
(b) Assume no other transactions occurred that affected the allowance account during April. Determine the balance of
Allowance for Doubtful Accounts at April 30.
Solution
(a) 1. March 31 Bad Debts Expense ($5,000,000 × .0025)............................
12,500
Allowance for Doubtful Accounts .............................
12,500
To record the bad debts expense for March.
2. April
10 Allowance for Doubtful Accounts .......................................
6,100
Accounts Receivable—K. Sully .................................
6,100
To write off K. Sully account deemed
uncollectible.
3. April
30 Accounts Receivable—K. Sully...........................................
6,100
Allowance for Doubtful Accounts .............................
6,100
To reinstate an account previously written off.
April
30 Cash ....................................................................................
Accounts Receivable—K. Sully .................................
To record payment on account in full.
(b) $2,140 + $12,500 – $6,100 + $6,100 = $14,640.
Question 5:
6,100
6,100
The following information is taken from the unadjusted trial balance of Goodwear Glove Co at December 31, 2008:
Accounts receivable
.............................................................. $ 26,000
Allowance for doubtful accounts .................................................................................... 400
Cash
.......................................................................................... 1,500
Cost of goods sold
.................................................................................... 178,000
Inventory
........................................................................................ 13,500
Prepaid expenses
650
Sales discounts
.......................................................................................... 3,180
Sales revenue
Supplies
............................................................................... 340,000
2,560
Other information:





All accounts are their normal balances.
Goodwear does not make any cash sales.
At December 31, 2007, accounts receivable were $37,500 and the allowance for doubtful accounts was $3,000.
Goodwear has found that approximately 8% of ending accounts receivable become uncollectible.
Goodwear’s credit terms are n/30.
Instructions:
(a)
Prepare the adjusting entry to adjust the allowance for doubtful accounts and record bad debts expense for 2008.
(b)
Prepare the current assets section of Goodwear’s December 31, 2008 balance sheet.
(c)
Calculate accounts receivable turnover and collection period and comment on their customers’ adherence to Goodwear’s
credit terms.
Solution
(a)
Ending balance of Allowance for doubtful accounts should be $26,000 x 8% = $2,080
Bad Debt Expense ($2,080 – 400) ............................................................................... 1,680
Allowance for Doubtful Accounts .......................................................................... .......... 1,680
(b)
Goodwear Glove Co.
Balance Sheet (partial)
December 31, 2008
Current assets
Cash
................................................................................................... ..... $ 1,500
Accounts receivable .................................................................................. $ 26,000
Less: Allowance for doubtful accounts .....................................................
Inventory
2,080 ........ 23,920
................................................................................................... ........ 13,500
Prepaid expenses ............................................................................................. 650
Supplies
......................................................................................
2,560
Total current assets ................................................................................................. ........ 42,130
(c)
Accounts receivable turnover = Net credit sales ÷ Average Gross AR
($340,000 – $3,180) ÷ [(26,000 + 37,500)/2] = 10.6
Collection period = 365 ÷ AR Turnover = 365 ÷ 10.6 = 34.4 days. This is just slightly more than the 30 day period within which
receivables are due, which is reasonable.
Question # 6
The following are all of the accounts with credit balances from Kupidy Company’s adjusted trial balance at December 31, 2008:
Accounts payable .................................................................................... $ 66,000
Accumulated amortization – equipment ................................................................. ........ 31,500
Allowance for doubtful accounts ............................................................................ .......... 1,600
Bank demand loan payable ..................................................................................... ........ 25,000
C. Kupidy, capital ................................................................................................... ....... 47,500
Gain on sale of equipment ...................................................................................... ............ 600
GST payable
................................................................................................... .......... 1,900
Interest payable
................................................................................................... ......... 2,100
Mortgage payable ................................................................................................... ..... 290,000
Note payable
................................................................................................... ........ 18,000
Salaries payable ......................................................................................... 4,400
Sales discounts
................................................................................................... .......... 3,750
Sales revenue
................................................................................................... ..... 458,000
Unearned revenue ................................................................................................... .......... 7,900
Other information:
The mortgage is due in monthly principal payments of $1,000 plus interest.
The note payable is a six-month, 10% note, interest due at maturity.
Instructions:
Prepare the current liabilities section of Kupidy’s December 31, 2008 balance sheet.
Solution
Kupidy Company
Balance Sheet (partial)
December 31, 2008
Liabilities
Current liabilities
Bank demand loan payable ..................................................................................... ... $ 25,000
Accounts payable ........................................................................................ 66,000
Interest payable
................................................................................................... ......... 2,100
GST payable
................................................................................................... .......... 1,900
Salaries payable ......................................................................................... 4,400
Unearned revenue ................................................................................................... .......... 7,900
Note payable
................................................................................................... ........ 18,000
Current portion of mortgage payable ($1,000 x 12) ............................................... ...
12,000
Total current liabilities ............................................................................. .... $137,300
Question 7:
Karen Blake’s salary earned in 2006 to November 30 was $62,000. Her salary in December 2006 was $6,000. Jim Fayad
began working with the company on December 1 and will be paid his first month's salary of $5,000 on December 31.
Income tax withholding for December for each employee is as follows:
Karen Blake
Federal and Provincial Income Tax
$1,920
Jim Fayad
$1,600
The following payroll tax rates are applicable:
CPP(1)
4.95%
EI
1.87%
(1)
Less a basic annual exemption of $3,500 per employee
Instructions
Record the payroll for the two employees at December 31 and record the employer's share of payroll tax expense for the
December 31 payroll. Maximum pensionable earnings are $42,100 and maximum insured earnings for EI are $39,000.
Solution
Dec. 31
Salaries Expense ............................................................................
11,000.00
Income Taxes Payable ($1,920 + 1,600) .............................
3,520.00
CPP Payable(2) .....................................................................
233.06
EI Payable(3) .........................................................................
93.50
Salaries Payable ...................................................................
7,153.44
To record December 31 payroll.
CPP(2)
Karen Blake (Karen has reached the maximum pensionable earnings)
$ 0.00
Jim Fayad(4) [($5,000 – ($3,500/12)) × .0495] =
233.06
$233.06
EI(3)
Karen Blake (Karen has reached the maximum insured earnings)
$ 0.00
Jim Fayad(4) ($5,000 × .0187)
93.50
$93.50
Employee Benefits Expense ..........................................................
363.96
CPP Payable ........................................................................
233.06
EI Payable ($93.50 × 1.4) ....................................................
130.90
To record employer's share of benefits for Dec. 31
payroll.
(4)
As Jim Fayad started work December 1, his salary has not yet reached the maximum for CPP or EI calculation.