Group Work – Chapter 7
1.
Assume McGregor Inc. has the following account balances at December 31, 2014:
Balance Sheet
Accounts Receivable
Allowance For Doubtful Accts
Net Realizable Value of AR
a)
$45,000
($500)
$44,500
Income Statement
Sales
Sales Discounts
Sales Returns & Allowance
Net Sales
$625,000
($20,000)
($5,000)
$600,000
If McGregor uses the Balance Sheet Approach and estimates its bad debt for the year to be 9% of the
Accounts Receivable balance, prepare the adjusting journal entry as of December 31, 2014.
$45,000*.09 = $4,050 Target balance of Allowance Account
Allowance for
Doubtful
Accounts
$500
$3,550
$4,050
Adjustment
Target Balance
DR
Bad Debt Expense
$3,550
Allowance for Doubtful Accounts
CR
$3,550
What is the Net Realizable Value of Accounts Receivable after the entry for this approach is posted?
Balance Sheet
Accounts Receivable
Allowance For Doubtful Accts
Net Realizable Value of AR
b)
$45,000
($4,050)
$40,950
If McGregor uses the Income Statement 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.
$600,000 * .01 = $6,000 Estimation of Bad Debt Expense for Period
DR
Bad Debt Expense
$6,000
Allowance For Doubtful Accounts
CR
$6,000
What is the Net Realizable Value of Accounts Receivable after the entry for this approach is posted?
Balance Sheet
Accounts Receivable
Allowance For Doubtful Accts
Net Realizable Value of AR
$45,000
($6,500)
$38,500
c)
On April 2nd, 2015, JD Rhimes comes to you and says they have declared bankruptcy and will not be able
to pay their Accounts Receivable debt of $400. Prepare the journal entry to write-off this specific
account.
DR
Allowance For Doubtful Accounts
Accounts Receivable
CR
$400
$400
How will the write-off of JD Rhimes account affect Net Income? No Effect
How will the write-off of JD Rhimes affect the Net Realizable Value of Accounts Receivable? No Effect
2.
During 2014, Dawson Inc. wrote off uncollectible accounts in the amount of $21,500. The January 1,
2014 balance in Allowance for Doubtful Accounts is $15,000, and the December 31, 2014 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 2014?
Allowance For Doubtful
Accounts
$15,000
Write
Offs
3.
a.
$21,500
Beg Bal
$48,500
Bad Debt Expense
$42,000
Ending Balance
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
CR
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
CR
Interest Receivable
Interest Revenue
($90,000 * .07 * 5/12 = $2,625)
$2,625
$2,625
c.
On April 1, 2015, McGregor received both the Principal and Interest due on the Note. Prepare a
journal entry to record this transaction.
DR
CR
Cash
Interest Receivable
Note Receivable
Interest Revenue
($90,000 * .07 * 3/12 = $1,575)
$94,200
$ 2,625
$90,000
$ 1,575