ACC301-sol-ch07

ACC301-sol-ch07 - PRACTICE EXERCISES PRACTICE 7-1 SIMPLE...

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PRACTICE EXERCISES PRACTICE 7 - 1 SIMPLE CREDIT SALE JOURNAL ENTRIES Accounts Receivable. ............................................ 100,000 Sales. ....................................................... 100,000 Cash . ..................................................................... 88,000 Accounts Receivable. ................... 88,000 PRACTICE 7 - 2 SALES DISCOUNTS: GROSS METHOD Accounts Receivable. ............................................ 500 Sales. ............................................ 500 Cash ($200  ×  0.97). .............................................. 194 Sales Discounts. ....................................... 6 Accounts Receivable. ................... 200 Cash . ..................................................................... 300 Accounts Receivable. ................... 300 PRACTICE 7 - 3 SALES DISCOUNTS: NET METHOD Accounts Receivable ($500  ×  0.97). .................... 485 Sales. ............................................ 485 Cash . ..................................................................... 194 Accounts Receivable ($200  ×  0.97) 194 Cash . ..................................................................... 300 Sales Discounts Not Taken. ......... 9 Accounts Receivable ($300  ×  0.97) 291 PRACTICE 7 - 4 SALES RETURNS AND ALLOWANCES Sales Returns and Allowances. ............................. 10,000
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Accounts Receivable. ................... 10,000 Inventory. .............................................................. 7,000 Cost of Goods Sold. ..................... 7,000 PRACTICE 7 - 5 BASIC BAD DEBT JOURNAL ENTRIES Bad Debt Expense. ................................... 8,000 Allowance for Bad Debts. ............ 8,000 Allowance for Bad Debts. ........................ 7,300 Accounts Receivable. ................... 7,300 PRACTICE 7 - 6 RECOVERY OF AN ACCOUNT PREVIOUSLY WRITTEN OFF July 23 Allowance for Bad Debts. ..................................... 7,500 Accounts Receivable. ................... 7,500 Nov. 1 Accounts Receivable. ............................................ 7,500 Allowance for Bad Debts. ............ 7,500 Cash . ..................................................................... 7,500 Accounts Receivable. ................... 7,500 PRACTICE 7 - 7 BAD DEBTS: PERCENTAGE OF SALES METHOD Bad Debt Expense ($500,000  ×  0.03). ................. 15,000 Allowance for Bad Debts. ............ 15,000 Allowance for Bad Debts. ........................ 13,700 Accounts Receivable. ................... 13,700 PRACTICE 7 - 8 BAD DEBTS: PERCENTAGE OF ACCOUNTS RECEIVABLE METHOD Bad Debt Expense. ................................................ 11,300 Allowance for Bad Debts. ............ 11,300 $100,000  ×  0.12 = $12,000; $12,000 – $700 = $11,300
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Allowance for Bad Debts. ..................................... 14,700 Accounts Receivable. ................... 14,700 PRACTICE 7 - 9 AGING ACCOUNTS RECEIVABLE Category Amount Percentage Total Less than 30 days $122,000 0.02 $ 2,440 31 - 60 days 24,000 0.10 2,400 61 - 90 days 8,000 0.30 2,400 Over 90 days 9,000 0.75 6,750 Total Allowance for Bad Debts $13,990 PRACTICE 7 - 10 ESTIMATION AND RECOGNITION OF WARRANTY EXPENSE Warranty Expense ($500,000  ×  0.06). ................. 30,000 Estimated Warranty Liability. ...... 30,000 Estimated Warranty Liability. .................. 32,000 Cash. ............................................. 32,000 PRACTICE 7 - 11 COMPARISON OF ACTUAL AND EXPECTED WARRANTY EXPENSE 1. Warranty Liability 0 Beginning Y1 Actual Estimated repairs 3,000 4,000 expense 1,000 Ending Y1 Actual Estimated repairs 6,500 6,000 expense 500 Ending 1/2 2. Compare existing balance with estimated future repairs: $150,000 × 0.04 = $6,000; $6,000 × 6/12 remaining = $3,000 Ending balance of $500 is much less than the estimated remaining repairs of $3,000.
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Compare past estimates with actual experience: Year 1 Estimated repairs— $100,000 × 0.04 × 6/12 = $2,000 Actual repairs—$3,000 Actual repairs were greater than estimated repairs. Year 2 Estimated repairs ( $100,000 × 0.04 × 6/12) + ( $150,000 × 0.04 × 6/12) = $5,000 Actual repairs $6,500 Again, actual repairs were greater than estimated repairs. The balance in the warranty liability account at the end of Year 2 appears to be much too  low. Using the company’s own estimates, the balance should be $3,000 instead of $500.  In addition, in the past two years the company has significantly underestimated the  amount of repairs.
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ACC301-sol-ch07 - PRACTICE EXERCISES PRACTICE 7-1 SIMPLE...

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