Group Work – Chapter 7
1.
Assume McGregor Inc. has the following account balances at December 31, 2014 – before adjusting
entries:
Trial Balance [Partial]
Accounts Receivable
Allowance for Doubtful Accounts
Sales Revenue
Sales Returns and Allowances
Sales Discounts
Debit
54,000
500
Credit
625,000
20,000
5,000
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, 2014.
Allowance for Doubtful Accts
DR
CR
Beg Bal
500
3,740 Bad Debt Expense
3,240 Target Balance
[54,000 * .06 = 3,240]
DR
Bad Debt Expense
3,740
Allowance For Doubtful Accounts
CR
3,740
b. What is the Net Realizable Value of Accounts Receivable that will be reported on the December 31,
2014 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, 2015, 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, 2015 after the customer write
off? [Assume no other activity has affected those accounts since December 31, 2014.]
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, 2014 – before
adjusting entries:
Trial Balance [Partial]
Accounts Receivable
Allowance for Doubtful Accounts
Sales Revenue
Sales Returns and Allowances
Sales Discounts
Debit
33,000
Credit
400
472,000
16,000
3,000
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, 2014.
Allowance for Doubtful Accts
DR
CR
400 Beginning Balance
4,530 Bad Debt Expense
[(472,000-16,000-3,000) * .01]
4,930 Ending Balance
DR
CR
Bad Debt Expense
4,530
Allowance For Doubtful Accounts
4,530
b. What is the Net Realizable Value of Accounts Receivable that will be reported on the December 31,
2014 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, 2015, 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, 2015 after the customer write
off? [Assume no other activity has affected those accounts since December 31, 2014.]
Accounts Receivable
Allowance for Doubtful Accounts
Net Realizable Value of AR
32,200
(4,130)
28,070
e. On April 19th, 2015 B&B Inc. paid McGregor Inc. $500 on an account that was previously writtenoff. Prepare the journal entry to reverse the previously recorded write-off and accept the cash payment.
Reverse Write-Off
-
Accept Customer Payment -
3.
DR
CR
Accounts Receivable
500
Allowance for Doubtful Accounts
500
Cash
Accounts Receivable
500
500
XYZ Inc. had a January 1, 2014 [Beginning Credit Balance] in Allowance for Doubtful Accounts of
$16,000. For the year 2014, XYZ Inc. reported $74,400 of Bad Debt Expense on the Income Statement. If
the December 31, 2014 [Ending Credit Balance] in Allowance for Doubtful Accounts is $12,900, how
much did XYZ write off as uncollectible for the year 2014?
Allowance for Doubtful Accts
DR
CR
Beginning Balance
16,000
Write-Offs
77,500
74,400 Bad Debt Expense
12,900 Ending Balance
4.
a.
On August 1, 2014, 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.
$90,000
$90,000
December 31, 2014 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
($90,000 * .07 * 5/12 = $2,625)
c.
CR
CR
$2,625
$2,625
On April 1, 2015, McGregor received both the Principal and Interest due on the Note. Prepare a
journal entry to record this transaction.
DR
Cash
Interest Receivable
Note Receivable
Interest Revenue
($90,000 * .07 * 3/12 = $1,575)
CR
$94,200
$ 2,625
$90,000
$ 1,575
5.
a.
On November 1, 2014, McGregor sold $900,000 worth of Accounts Receivables to Foster Factors
Inc. for quick cash flow. Foster Factors Inc. will charge a 4% Finance Fee and retain an additional
6% to be remitted at a later date. The selling of these receivables is on a Without Recourse basis.
Prepare journal entries for both McGregor and Foster Factors on November 1, 2014 to recognize this
transaction.
McGregor
Cash
Loss on Sale
Due From Factor
Accounts Receivable
DR
$810,000
$ 36,000
$ 54,000
CR
$900,000
($900,000 * .04 = $ 36,000)
($900,000 * .06 = $ 54,000)
Foster Factors
Accounts Receivable
Financing Revenue
Due to McGregor
Cash
b.
$900,000
$ 36,000
$ 54,000
$810,000
Assume McGregor sold the Accounts Receivable to Foster Factors Inc. on a With Recourse basis.
Both parties agree that a fair estimate of the Recourse Liability is $5,000. Prepare the journal entries
for both McGregor and Foster Factors on November 1, 2014 to recognize this transaction.
McGregor
Cash
Loss on Sale
Due From Factor
Accounts Receivable
Recourse Liability
DR
$810,000
$ 41,000
$ 54,000
CR
$900,000
$ 5,000
($900,000 * .04 = $ 36,000) + $5,000 = $41,000
($900,000 * .06 = $ 54,000)
Foster Factors
Accounts Receivable
Financing Revenue
Due to McGregor
Cash
$900,000
$ 36,000
$ 54,000
$810,000
6.
On January 1, 2014, ABC Co. sold land at cost worth $63,506 in exchange for a 3-year, $80,000 noninterest bearing Note Receivable. The current implied interest rate for notes of this type is 8%.
a. Prepare ABC Co.’s journal entry at January 1, 2014 to recognize this transaction.
Notes Receivable
80,000
Land
Discount on Note Receivable
63,506
16,494
b. Assume ABC Co. uses the effective interest method to allocate the Note Discount to interest
revenue. Prepare the necessary adjusting entry after the first year of the Note on December 31,
2014.
Discount on Note Receivable
Interest Revenue
5,081
5,081
($63,506 * .08 = $5,081)
c. At December 31, 2015 [end of second year], prepare the adjusting journal entry necessary for the
Note Receivable.
Discount on Note Receivable
Interest Revenue
5,487
5,487
($68,587 * .08 = $5,487)
d. At December 31, 2016 [date of maturity], prepare the adjusting journal entry [or entries] for the
Note Receivable.
Discount on Note Receivable
Interest Revenue
5,926
5,926
($74,074 * .08 = $5,926)
Cash
80,000
Notes Receivable
80,000