Group Work – Chapter 7
1.
Assume McGregor Inc. has the following account balances at December 31, 2011 – before adjusting
entries:
Accounts Receivable
Allowance For Doubtful Accounts
Sales Revenue
$54,000
500 (credit balance)
$225,000
Refer to the information above for McGregor
a. If McGregor uses the Balance Sheet Approach and estimates its bad debt for the year to be 6% of the
Accounts Receivable balance, prepare the adjusting journal entry as of December 31, 2011.
Allowance For Doubtful Accounts
500 Beg Bal
2,740 Adjustment Required
3,240 Target Balance
$54,000 * .06 = $3,240
DR
CR
Bad Debt Expense
2,740
Allowance For Doubtful Accounts
2,740
b. What is the Net Realizable Value of Accounts Receivable that will be reported on the December 31,
2011 Balance Sheet after the adjusting entry is posted?
Accounts Receivable
Allowance for Doubtful Accounts
Net Realizable Value of AR
54,000
(3,240)
50,760
c. Assume, on January 8, 2012, JD Rhimes Inc. contacts McGregor Inc and says they have declared
bankruptcy and will not be able to pay their Accounts Receivable debt of $2,000. Prepare the journal
entry to write-off this customer’s account.
DR
Allowance For Doubtful Accounts
Accounts Receivable
CR
2,000
2,000
d. What is the Net Realizable Value of Accounts Receivable on January 8, 2012 after the customer write
off? [Assume no other activity has affected those accounts since December 31, 2011.]
Accounts Receivable
Allowance for Doubtful Accounts
Net Realizable Value of AR
52,000
(1,240)
50,760
e. Does the write off affect the Net Realizable Value of Accounts Receivable? No
f. Does the write off affect Net Income? No
2.
Assume instead, McGregor Inc. has the following account balances at December 31, 2011 – before
adjusting entries:
Accounts Receivable
Allowance For Doubtful Accounts
Net Sales Revenue
$33,000
400 (credit balance)
453,000
[Assume all Sales are Credit Sales)
Refer to the information above for McGregor
a. If McGregor uses the Income Statement Approach instead of the Balance Sheet approach and
estimates it bad debt for the year to be 1% of Net Credit Sales, prepare the adjusting journal entry as
of December 31, 2011.
Allowance For Doubtful Accounts
400 Beg Bal
4,530 Adjustment Required [$453,000 * .01]
4,930 Ending Balance after Adjustment
DR
Bad Debt Expense
4,530
Allowance For Doubtful Accounts
CR
4,530
b. What is the Net Realizable Value of Accounts Receivable that will be reported on the December 31,
2011 Balance Sheet after the adjusting entry is posted?
Accounts Receivable
Allowance for Doubtful Accounts
Net Realizable Value of AR
33,000
(4,930)
28,070
c. Assume, on January 8, 2012, JD Rhimes Inc. contacts McGregor Inc and says they have declared
bankruptcy and will not be able to pay their Accounts Receivable debt of $800. Prepare the journal
entry to write-off this customer’s account.
DR
Allowance For Doubtful Accounts
Accounts Receivable
CR
800
800
d. What is the Net Realizable Value of Accounts Receivable on January 8, 2012 after the customer write
off? [Assume no other activity has affected those accounts since December 31, 2011.]
Accounts Receivable
Allowance for Doubtful Accounts
Net Realizable Value of AR
3.
32,200
(4,130)
28,070
XYZ Inc. had a January 1, 2011 [Beginning Credit Balance] in Allowance for Doubtful Accounts of
$16,000. For the year 2011, XYZ Inc. reported $74,400 of Bad Debt Expense on the Income Statement. If
the December 31, 2011 [Ending Credit Balance] in Allowance for Doubtful Accounts is $12,900, how
much did XYZ write off as uncollectible for the year 2011?
Allowance For Doubtful Accounts
16,000 Beginning Balance
Write-Offs
77,500
74,400 Bad Debt Expense
12,900 Ending Balance
4.
During 2012, Dawson Inc. wrote off uncollectible accounts in the amount of $21,500. The January 1, 2012
balance in Allowance for Doubtful Accounts is $15,000, and the December 31, 2012 balance in Allowance
for Doubtful Accounts is $42,000. What amount must be reported as Bad Debt Expense on the Income
Statement for Dawson Inc. for the year 2012?
Allowance For Doubtful Accounts
15,000 Beginning Balance
Write-Offs
21,500
48,500 Bad Debt Expense
42,000 Ending Balance
5.
a.
On August 1, 2011, McGregor Inc. loaned $90,000 to a key financial officer. The loan is due in 8
months, and it has a 7% rate. The principal and interest are due at maturity. Prepare a journal entry
necessary to recognize the loan on August 1.
DR
Note Receivable
Cash
b.
CR
$90,000
$90,000
December 31, 2011 is the fiscal year-end for McGregor Inc., and they record adjusting journal entries
on this date before preparation of financial statement. Prepare an adjusting entry necessary for the
loan at year-end.
DR
Interest Receivable
Interest Revenue
CR
$2,625
$2,625
($90,000 * .07 * 5/12 = $2,625)
c.
On April 1, 2012, McGregor received both the Principal and Interest due on the Note. Prepare a
journal entry to record this transaction.
DR
Cash
$94,200
Interest Receivable
Note Receivable
Interest Revenue
($90,000 * .07 * 3/12 = $1,575)
CR
$ 2,625
$90,000
$ 1,575