Chapter 7 Solutions - EXERCISE 7-5(1520 minutes(a(1 June 3...

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EXERCISE 7-5 (15–20 minutes)(a) (1) June 3Accounts Receivable—Chester..................3,000Sales Revenue.....................................3,000June 12Cash.......................................................................................................................................2,940Sales Discounts ($3,000 X 2%)....................60Accounts Receivable—Chester.........3,000(2) June 3Accounts Receivable—Chester..................2,940Sales Revenue ($3,000 X 98%)...........2,940June 12Cash.......................................................................................................................................2,940Accounts Receivable—Chester.........2,940
EXERCISE 7-5 (Continued)(b)July 29Cash...........................................................3,000Accounts Receivable—Chester.....2,940Sales Discounts Forfeited..............60(Note to instructor:Sales discounts forfeited could have been recog-nized at the time the discount period lapsed. The company, however,would probably not record this forfeiture until final cash settlement.)EXERCISE 7-7 (10–15 minutes)(a)Bad Debt Expense.........................................8,500Allowance for Doubtful Accounts......8,500**.01 X ($900,000 – $50,000) = $8,500(b)Bad Debt Expense.........................................3,000Allowance for Doubtful Accounts......3,000**Step 1:.05 X $100,000 = $5,000 (desired credit balance inallowance account)Step 2:$5,000 – $2,000 = $3,000 (required credit entry to bringallowance account to $5,000 credit balance)EXERCISE 7-8 (15–20 minutes)(a)Allowance for Doubtful Accounts....................6,000Accounts Receivable...............................6,000
(b)Accounts Receivable$800,000Less: Allowance for Doubtful Accounts40,000Net realizable value$760,000(c)Accounts Receivable$794,000Less: Allowance for Doubtful Accounts34,000Net realizable value$760,000
EXERCISE 7-9 (8–10 minutes)(a)Bad Debt Expense.............................................5,350Allowance for Doubtful Accounts...........5,350($90,000 X 4%) + $1,750 = $5,350(b)Bad Debt Expense.............................................6,800Allowance for Doubtful Accounts...........6,800$680,000 X 1% = $6,800EXERCISE 7-10 (10–12 minutes)(a)The direct write-off approach is not theoretically justifiable eventhough required for income tax purposes. The direct write-off methoddoes not match expenses with revenues of the period, nor does itresult in receivables being stated at estimated realizable value on thebalance sheet.(b)Bad Debt Expense – 2% of Sales = $44,000 ($2,200,000 X 2%)Bad Debt Expense – Direct Write-Off = $31,330 ($7,800 + $6,700 +$7,000 + $9,830)Net income would be $12,670 ($44,000 – $31,330) lower underthe percentage-of-sales approach.

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