Chatper 7 Homework Solutions

# Chatper 7 Homework Solutions - Chapter 7 Homework Solutions...

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Chapter 7 Homework Solutions LO 2 EXERCISE 7-3 COMPARISON OF THE DIRECT WRITE-OFF AND ALLOWANCE METHODS OF ACCOUNTING FOR BAD DEBTS Net income under each of the two alternatives is as follows: Direct write-off method: \$145,000 – \$10,500 = \$134,500 Allowance method: \$145,000 – (2% × \$650,000) = \$145,000 – \$13,000 = \$132,000 Conclusion: The direct write-off method would result in a lesser amount of expense and therefore in a higher net income. However, under current accounting standards, if bad debts are material in amount, the allowance method must be used. In addition, it is not acceptable for a company to choose accounting methods on the basis of their ef- fects on net income. LO 2 EXERCISE 7-4 ALLOWANCE METHOD OF ACCOUNTING FOR BAD DEBTS—COM- PARISON OF THE TWO APPROACHES 1. a. Based on 2% of net credit sales: 2007 Dec. 31 Bad Debts Expense 16,680 Allowance for Doubtful Accounts 16,680 To record estimated bad debts: 2% × \$834,000. Assets = Liabilities + Owners’ Equity –16,680 –16,680 7-1

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7-2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL b. Based on 6% of year-end accounts receivable: 2007 Dec. 31 Bad Debts Expense 16,606 Allowance for Doubtful Accounts 16,606 To record estimated bad debts: Need balance of 6% of \$320,100 \$19,206 (cr) Balance before adjustment is 2,600 (cr) Amount of entry must be \$16,606 (cr) Assets = Liabilities + Owners’ Equity –16,606 –16,606 2. a. No change. b. 2007 Dec. 31 Bad Debts Expense 21,806 Allowance for Doubtful Accounts 21,806 To record estimated bad debts: Need balance of 6% of \$320,100 \$19,206 (cr) Balance before adjustment is (2,600 ) (dr) Amount of entry must be \$21,806 (cr) Assets = Liabilities + Owners’ Equity –21,806 –21,806
CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-3 LO 4 EXERCISE 7-6 NOTES RECEIVABLE 1. Rozelle Company is the maker; Dougherty Corporation is the payee. 2. The maturity date is March 1, 2008. 3. 2007 Sept. 1 Notes Receivable 45,000 Accounts Receivable 45,000 To record receipt of six-month, 7% promissory note in exchange for open account. Assets

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## This note was uploaded on 03/30/2008 for the course ACCT Intro to f taught by Professor Dunno during the Spring '08 term at University of Iowa.

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Chatper 7 Homework Solutions - Chapter 7 Homework Solutions...

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