EXERCISE 7.1
a.
Cash includes the following:
1. Commercial savings account—
First National Bank
$ 600,000
1. Commercial chequing account—
First National Bank
900,000
3. Money market fund—Commercial Bank of
Montreal
5,000,000
6. Petty cash
3,000
8. Cash floats (8 X $475 + 12 X $600)
11,000
12. Currency and coin on hand
7,700
Cash reported on December 31, 2020,
$6,521,700
statement of financial position
b.
Other items classified as follows:
1.
The bank overdraft at the Royal Scotia Bank of $35,000 should be
reported as a current liability as there are is no available cash in
another account at Royal Scotia Bank available for offset.
The balance (at First National Bank of $100,000) requirement does
not affect the balance in cash. A note disclosure indicating the
arrangement and the amounts involved should be described in
the notes.
Travel advances should be reported as prepaid travel in the
amount of $18,000.
Cash restricted in the amount of $1,500,000 for the retirement of
long-term debt should be reported as a noncurrent asset
identified as “Cash restricted for retirement of long-term debt.”
An IOU from Marianne Koch should be reported as a receivable
from officer in the amount of $1,900.
2.
4.
5.
7.
EXERCISE 7.1 (CONTINUED)
9.
10.
11.
13.
Certificates of deposits of $500,000 each should be classified as
temporary investments (probably using the cost/amortized cost
model or the fair value through net income model). They cannot
be cash equivalents as the original maturities exceed 90 days.
The first postdated cheque of $25,000 should be reported as an
accounts receivable. The second postdated cheque of $11,500 is
for unearned revenue or customer deposits, and should not be
recognized until the cheque is deposited.
Commercial paper should be reported as temporary investments
(probably using the cost/amortized cost model or the fair value
through net income model) .
Investments in shares of Sortel should be classified with FV-NI
Investments at the fair value of $4,100.
c.
The $100,000 balance in item 2 is called a compensating balance.
First National Bank would require Fashion to maintain a
compensating balance to support any existing or maturing
obligations and/or credit facilities that Fashion has with First
National Bank.
d.
A potential lender to Fashion would be interested in Fashion’s
liquidity, solvency, and ability to service obligations. From the
perspective of a potential lender, it is important that Fashion
excludes the $1.5 million restricted cash from the amount of cash
reported, because the $1.5 million cannot be used by Fashion to
meet current obligations. Inclusion of the $1.5 million restricted
cash in the amount of cash reported would result in an
inaccurately reported liquidity position.
EXERCISE 7.3
Current assets
Accounts receivable
Customers
Accounts (of which accounts in
the amount of $40,000 have
been pledged as security for a
bank loan)
Instalment accounts collectible
due in 2021
Total from customers
Other* ($12,640 + $69,649)
$165,000
91,000
256,000
82,289
$338,289
Non-Current Accounts Receivable
Advance to subsidiary company**
Instalment accounts collectible
due after December 31, 2021
101,000
80,000
* These items could be separately classified, if considered material
** This classification assumes that these receivables are not collectible
within one year and thus are non-current since they were advanced
in 2015 and remain outstanding.
EXERCISE 7.7
Balance, January 1, 2020
Bad debt expense accrual .8% X ($80,000,000 X 0.9)
Uncollectible receivables written off
Balance, December 31, 2020 before adjustment
Allowance adjustment
Balance, December 31, 2020
Bad Debt Expense .......................................
Allowance for Doubtful Accounts .....
$400,000
576,000
976,000
(500,000)
476,000
49,000
$525,000
49,000
49,000
EXERCISE 7.8
a.
The direct write-off approach is not theoretically justifiable. Direct
write-off does not match (bad debt) expense 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 using the allowance method and percentageof-sales approach = 2% of Sales = $64,000
($3,200,000 X 2%)
Bad Debt Expense using the direct write-off method = $33,330
($7,700 + $6,800 + $12,000 + $6,830)
Net income would be $30,670 ($64,000 – $33,330) lower under the
allowance method and percentage-of-sales approach.
c.
The direct write-off method is not considered appropriate, except
when the amount uncollectible is highly immaterial.
EXERCISE 7.11
a.
Interest bearing note – Option 1:
September 30, 2020
Notes Receivable ......................................
Accounts Receivable .......................
December 31, 2020
Interest Receivable ..................................
Interest Income1 ...............................
1
($105,000 X 8% X 3/12)
September 30, 2021
Cash ..........................................................
Interest Receivable ..........................
Interest Income2 ...............................
Notes Receivable .............................
2
($105,000 X 8% X 9/12)
b.
105,000
105,000
2,100
2,100
113,400
2,100
6,300
105,000
Non-interest bearing note – Option 2:
September 30, 2020
Notes Receivable ......................................
Accounts Receivable .......................
December 31, 2020
Notes Receivable ......................................
Interest Income3 ...............................
3
($105,000 X 8% X 3/12)
September 30, 2021
Notes Receivable ......................................
Interest Income4 ...............................
4
($105,000 X 8% X 9/12)
To record interest income
105,000
105,000
2,100
2,100
6,300
Cash .......................................................... 113,400
Notes Receivable .............................
To record the collection of the note receivable
6,300
113,400
EXERCISE 7.11 (CONTINUED)
c.
d.
There is no difference in the amount of interest income earned
in 2020 and 2021 because both options bear interest at 8%. The
“non-interest bearing” note has the interest included in the face
amount of the note and is journalized to account for this. The
actual interest earned is the same under both options.
The liquidity of Big Corp. at December 31, 2020 will remain
unchanged whichever option is selected. Under option 1, the note
balance remains at $105,000 but interest receivable of $2,100
results in a total of $107,100 under current assets. Under Option
2, the balance of the note, after recording the accrual of interest
income is also $107,100 under current assets. The cash flows will
also be the same under both options as the amount collected at
the maturity of the note is $113,400.
EXERCISE 7.15
a.
b.
c.
Cash ..........................................................
Finance Expense (400,000 X 3%) ............
Notes Payable..................................
188,000
12,000
Cash ..........................................................
Accounts Receivable ......................
350,000
Notes Payable ...........................................
Interest Expense1 .....................................
Cash .................................................
1
($200,000 X 10% X 3/12)
200,000
5,000
200,000
350,000
205,000
EXERCISE 7.16
1.
2.
3.
4.
Cash
Loss on Disposal of Receivables1 ........
Accounts Receivable ...................
1
($20,000 X 10%)
18,000
2,000
Cash .......................................................
Finance Expense ($55,000 X 8%) .........
Notes Payable ...............................
50,600
4,400
Bad Debt Expense2................................
Allowance for Doubtful Accounts
2
[($82,000 X 5%) + $1,750]
5,850
Bad Debt Expense3................................
Allowance for Doubtful Accounts
3
($430,000 X 1.5%)
6,450
20,000
55,000
5,850
6,450