Chapter 7: Financial Instruments: Cash, Receivables and
Payables
Assignment 7-7
Requirement 1
31 December 20x5—Write-off of doubtful accounts:
Allowance for doubtful accounts .................................................... 1,000
Accounts receivable (Customer Slo).........................................
1,000
Requirement 2
31 December 20x5—Adjusting entry to record estimated bad debt expense
Case A—Based on credit sales:
Bad debt expense ............................................................................ 1,600
Allowance for doubtful accounts ..............................................
1,600
Computation: $160,000 x 1% = $1,600.
Case B—Based on ending balance of accounts receivable:
Bad debt expense ............................................................................ 1,200
Allowance for doubtful accounts ..............................................
1,200
Computations:
Balance in accounts receivable, 31 December 20x5:
Beginning balance ................................................................ $ 51,000
Add credit sales .................................................................... 160,000
Deduct: collections............................................................. (170,000)
write-off (Slo) ........................................................ ( 1,000)
Ending 20x5 balance ........................................................... $ 40,000
Allowance account ($3,000 – $1,000)..................................... $ 2,000 Credit
Balance needed in allowance account ($40,000 x 8%) .......... $ 3,200
Balance currently in allowance account ($3,000 - $1,000) ...
2,000
Increase in allowance account .................................................. $ 1,200
Case C—Based on aging and varying loss rates:
Bad debt expense .......................................................................
Allowance for doubtful accounts .........................................
1,360
1,360
Accounts
Probability of
Estimated
Age
Receivable
Noncollection
Uncollectible
Less than 30 days
$28,000
x
2%
=
$ 560
31 to 90 days
7,000
x
10%
=
700
91 to 120 days
3,000
x
30%
=
900
More than 120 days
2,000
x
60%
=
1,200
Totals
$40,000
$3,360
Balance required in allowance account ............................................................ $3,360
Balance in allowance account currently............................................................ 2,000
Increase required in allowance account ........................................................... $1,360
Requirement 3
Case A
Earnings, 20x5:
Bad debt expense
$ 1,600
Statement of financial position, 20x5:
Accounts receivable
$40,000
Less: Allowance for doubtful accounts 3,600
Carrying (book) value
$36,400
Case B
Case C
$ 1,200
$ 1,360
$40,000
3,200
$36,800
$40,000
3,360
$36,640
Requirement 4
a)
Estimated bad debt expense based on composite percent of credit sales—
simple, not costly to implement, and emphasizes that only credit sales cause bad
debt losses. Focus on earnings and recording expenses. Primary disadvantage
is that it does not tend to compensate in the short-term for prior estimating
errors.
b) Estimated bad debt expense based on net realizable value of accounts
receivable and a composite percent—simple, not costly to implement,
emphasizes net realizable value of the accounts receivable (rather than credit
sales). Focuses on the statement of financial position and the definition of a
current asset. It tends to compensate for prior estimating errors in the short and
long term. However, it does not directly consider aging.
c) Estimated bad debt expense based on net realizable value of accounts
receivable—emphasizes net realizable value of accounts receivable by age
categories. Focuses on the statement of financial position and the definition of a
current asset. Tends to compensate for prior estimating errors in the short and
long term. Allows for changes: other methods work well when conditions are
stable. Primary disadvantage is the time and cost associated with preparing
aging schedules.
Requirement 5
1 August 20x6—To record collection of a bad debt previously written off:
Accounts receivable (Slo) ....................................................................... 1,000
Allowance for doubtful accounts ....................................................
Cash ......................................................................................................... 1,000
1,000
Accounts receivable (Slo) ................................................................
1,000
Assignment 7-16
Requirement 1
1 January 20x5
Cash ............................................................................................. 20,000
Note receivable ........................................................................... 40,000
Sales revenue......................................................................
60,000
31 December 20x5
Cash ............................................................................................. 3,200
Interest revenue ($40,000 x .08) ......................................
3,200
31 December 20x6
Cash ............................................................................................. 43,200
Note receivable ...................................................................
Interest revenue ..................................................................
40,000
3,200
Requirement 2
Gross Basis
1 January 20x5
Cash ............................................................................................. 20,000
Note receivable ........................................................................... 40,000
Discount on note receivable ($40,000 – $35,721*) ......
Sales revenue......................................................................
4,279
55,721
* Present value of prinipal:
$40,000 (P/F, 8%, 2)
$34,294
Present value of interest annuity
$800 (P/A, 8%, 2)
1,427
$35,721
31 December 20x5
Cash .............................................................................................
800
Discount on note receivable ...................................................... 2,058
Interest revenue ($35,721 x 8%) ......................................
2,858
31 December 20x6
Cash ............................................................................................. 40,800
Discount on note receivable ($4,279 – $2,058) ..................... 2,221
Note receivable ...................................................................
Interest revenue (($35,721 + $2,058) x 8%), rounded ...
40,000
3,021
Requirement 3
Interest revenue:
20x5
20x6
Sales revenue:
20x5
20x6
Req. 1
Req. 2
$ 3,200
3,200
$ 2,858
3,021
60,000
0
55,721
0
Assignment 7-25
Requirement 1
a)
Purchased merchandise (1 April 20x5):
Inventory ...................................................................................... 10,000
Note payable, 16% .................................................................
b) Sale:
Notes receivable ......................................................................... 16,000
Discount on notes receivable ................................................
Sales .......................................................................................
Cost of goods sold ...................................................................... 8,320
Inventory .................................................................................
$16,000 (P/F, 15%, 2) + $480 (P/A, 15%, 2) = $12,878
c)
10,000
3,122
12,878
8,320
US-denominated liability:
Inventory ...................................................................................... 14,681
Accounts payable ($13,580/$.925) ....................................
14,681
d) Bank demand loan:
Cash ............................................................................................. 25,000
Bank loan payable .................................................................
25,000
e)
f)
To record salaries and employee deductions:
Salary expense ............................................................................ 50,000
Employee income taxes payable...........................................
EI payable ...............................................................................
CPP payable............................................................................
Union dues payable ...............................................................
Cash ........................................................................................
15,000
3,100
2,900
500
28,500
To record payroll expenses payable by the employer:
Salary expense ............................................................................ 7,240
CPP payable............................................................................
EI payable ($3,100 x 1.4) ......................................................
2,900
4,340
To record remittance of payroll deductions:
Employee income taxes payable ............................................... 14,350
EI payable .................................................................................... 7,250
CPP payable ................................................................................ 5,720
Union dues payable ....................................................................
480
Cash ........................................................................................
27,800
g)
US-denominated account receivable:
Accounts receivable ($23,790/$.914) ..................................... 26,028
Sales .......................................................................................
Cost of goods sold ...................................................................... 11,110
Inventory .................................................................................
h) Cash dividends declared but not yet paid:
Retained earnings (or dividends) .............................................. 14,000
Cash dividends payable .........................................................
i)
26,028
11,110
14,000
Year-end adjustments:
Interest expense ($10,000 x .16 x 9/12) .................. 1,200
Interest payable ....................................................................
Interest receivable ($480 x 11/12) ..........................................
440
Discount on note receivable ($1,771 – $440) ........................ 1331
Interest revenue ($12,278 x .15 x 11/12) ..........................
Exchange loss .............................................................................
193
Accounts payable ...................................................................
($13,580/$.913) = $14,874 – $14,681
Interest expense ......................................................................... 1,875
Interest payable .....................................................................
$25,000 x .15 x 6/12
Accounts receivable....................................................................
29
Exchange gain ........................................................................
($23,790/$.913) = $26,057 – $26,028
Requirement 2
Assets:
Notes receivable ($16,000 – ($3,122 - $1,331)) ........................... $14,209
Interest receivable .............................................................................
440
Accounts receivable (US customer) .............................. 26,057
Liabilities:
Interest payable ($1,200 + $1,875) ................................................
Notes payable, 16% ...........................................................................
Accounts payable (US supplier) ........................................................
Bank loan payable .............................................................................
Income tax payable ............................................................................
EI payable ...........................................................................................
CPP payable........................................................................................
Union dues payable ...........................................................................
Cash dividends payable .....................................................................
$3,075
10,000
14,874
25,000
650
190
80
20
14,000
1,200
1,771
193
1,875
29
Assignment 7-32
Requirement 1
a)
Deposits In transit—All deposits (#51 through #56) except #56 have been
recorded by the bank; therefore, the deposit in transit is: #56, $3,500. This
amount can be verified as: $2,000 + $190,000 – $188,500 = $3,500.
b) Cheques outstanding: Inspection of the cheque numbers reveals that the
following are outstanding: #121, $1,000; #177, $2,500; #178, $3,000; and
#179, $1,500; total, $8,000. This amount can be verified as: $6,000 +
$198,000 – $196,000 = $8,000.
Requirement 2
Bank Reconciliation, 31 December
Bank
Books
Balances, 31 December ................................................................$76,550 $55,600*
Additions:
Deposit in transit (#56) ........................................................... 3,500
Account receivable collected ..................................................
6,720
Customer deposit .....................................................................
10,000
Deductions:
Cheques outstanding (#121, #177–179) ............................ (8,000)
NSF cheque, Customer Belinda .............................................
(200)
United Fund transfer ..............................................................
(50)
Bank service charge ...............................................................
___(20)
Correct cash balance .....................................................................$72,050 $72,050
* $56,000 - $400. Or, $400 may be included as a reconciling item, added to the
bank.
The cash balance is reported on the statement of financial position as $72,450
($72,050 + $400)
Requirement 3
Journal entries from bank reconciliation:
a) Cash ............................................................................................16,720
Account receivable ..............................................................
Unearned income ................................................................
b) Account receivable, Customer Belinda ....................................
Contributions, United Fund .......................................................
Expense, bank service charge ..................................................
Cash
6,720
10,000
200
50
20
270