HMsolotion-ch7 - Chapter 7 Homework Solution and etc. E7-3...

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Unformatted text preview: Chapter 7 Homework Solution and etc. E7-3 Trade and Cash Discounts Note that the 30% trade discount should not be recorded at alll The actual transaction price is $600 per unit x 100 units x 70% = $42,000. The gross method and the net method are for cash discounts, not for trade discount. Gross Method 1. November 17 (when sales were made) Accounts receivable ................................. .. 42000 Sales ................................................. .. 42,000 November 26 (when payments were made within the discount period) Cash ($42,000 x 98%) ............................. .. 41,160 Sales discounts ($42,000 x 2%) ............... .. 840 Accounts receivable ......................... .. 42,000 iVUIf’ that "Suites discounts" is a t'ontrtmtties account, is) (m im'wm’ SHtIffm'é’ii'f it is reported (tsfoiiows. Stiif’S .................................................... .. 42,000 Less: Stiles discounts ........................... .. {M1 Sides (m’t) ............................................ .. $41,160 2. November 17 (when sales were made) Accounts receivable ................................. .. 42000 Sales ................................................. .. 42,000 November 26 (when payments were made m the discount period) Cash ............................... .. 42,000 Accounts receivable ......................... .. 42,000 3. Net method (1') November 17 (when sales were made) Accounts receivable ................................. .. 41,160 Sales ($42,000 it 98%) .................... .. 41,160 November 26 (when payments were made within the discount period) Cash ......................................................... .. 41,160 Accounts receivable ......................... .. 42,000 (2') November 17 (when sales were made) Accounts receivable ................................. .. 41,160 Sales ................................................. .. 41,160 November 26 (when payments were made m the discount period) Cash ......................................................... .. 42,000 Accounts receivable . 41,160 Interest revenue ................................ .. 840 E 7-7 Accounting for Uncollectible Accounts 1. Journal entries write-off of A! R Allowance for uncollectible accounts ...... .. 21,000 Accounts receivable ................. .. 21,000 Note that the tvt‘fteagfqutu'counts recefi-wbte does not affect A/R (net) and net income! collection of a receivable previonslv written off We neea' 17) reverse the write—afi‘entrvflrst: Accounts receivable ................................. .. 1,200 Allowance for uncollectible accounts 1,200 Then, a regular entr_\‘fi:r cash collection: ,5 Cash ......................................................... .. 1,200 Accounts receivable ......................... .. 1,200 record bad debt expense Since Colorado Rocky uses the balance sheet 11181110911,er need to ( 1) figure out the desired balance for allowance forfincollectible account: = $625,000 AIR ending balance x 10% = $62,500 (2) figure out the balance in allowance for uncollectible account before adjusting: = $32,000 BB - $21,000 write off + $1,200'reverse = $12,200 Allowance for Uncollectible Accounts Bal. b/f adi. 12,200 . ' Adlustment needed = Bad debt expense '? A/62,500 — 12,200 = 50,300 Desired bal. 62,500 Bad debt expense ..................................... .. 50,300 Allowance for uncollectible accounts 50,300 2. Balance sheet presentation: There are two ways to present A/R with Allowance for uncollectible accounts: C urrent assets: Accounts receivable, net of $62,500 in allowance for uncollectible accounts $562,500 Or, C urrcnt assets: Accounts receivable $625,000 Less: Allowance for uncollectible accounts 562.500) Accounts receivable (net) $562,500 E- 7-14 Assigning of specific accounts receivable Note that assigning specific accounts receivable is (t secured borrowing. Loan = $450,000 Finance charge = $600,000 A/R assigned x 1.8% = $10,800 Cash received = $450,000 7 10,800 = $439,200 Journal entr to record this secured borrowino: Cash ................................................................. .. 439,200 Finance charge expense (on, other et';.:ense) .... .. 10,800 Liability—Financing an'angement ......... .. 450,000 E- 7-15. Factoring of accounts receivable without recourse Nate rbmfat'mring (fart-aunts receivable is U "sale [fit is without recourse. the company (lees HUI {lave (my contingent ilt‘illillt)‘. A/R sold = $60,000 Cash received = $60,000 x 90% = $54,000 Receivable from factor = $60,000 it 10% - $60,000 it 2% fee = $4,800 Journal entr to record this factorinU without recourse: Cash ................................................................. .. 54,000 _ Receivable from factor .................................... .. 4,800/ a plug'm Loss on sale of receivable 1,200 Accounts receivable ............................... .. 60,000 E 7-16 Factoring of accounts receivable with recourse Note titt'itfln.‘mring ({f‘aemmzts reeeiwble is a "sale [fit is with remurse, the eompnnv [ms to establish a contingent liability. A/R sold = $60,000 Cash received = $60,000 it 90% = $54,000 Receivable from factor = $60,000 it 10% - $60,000 x 2% fee = $4,800 (the above are the snare as in E 77 l5 ) Recourse obligation = $3,000 (given) Journal entr to record this factorinU with recourse: Cash ................................................................. .. 54,000 _ Receivable from factor .................................... .. 4,800/ a plug'm Loss on sale of receivable .. 4,200 Accounts receivable ............................... .. 60,000 Recourse liability ................................... .. 3,000 E 7-26 Bank reconciliation 1. Bank reconciliation schedule: Balance per bank ................................... .. $38,018 Add: Deposits outstanding .............................. .. $6,300 Bank error in recording disbulsetnent .... .. 270“ 6,570 Less: Checks outstanding ......................... .. 18.4201 Corrected cash balance ............................ .. $36168 Balance per book ................... .. $38,918 Add: Error in recording deposit 1,800t1 Less: Service charges ...................................... .. $30 NSF checks ............................................ .. 1,200 Automatic loan payment ........................ .. 3.320 [4.5501 Corrected cash balance ............................ .. 36.168 Ll) a. $30 payment was recorded as a $300 payment by the bank. The bank over—deducted $270. Therefore, the $270 difference should be added back to the bank balance b. The deposit (an increase in cash) should be $2,000, but was recorded as $200. So, we need to add $2,000 7 200 = $1,800 to the book balance. 2. Journal entries: Note that journal entries are‘f'or the company. notfor the bank. Therefore. we only need to look at the Balance per book part in the bank reconciliation schedule. To record service charUes; Miscellaneous expense .................................... .. 30 Cash ........................................................ ., 30 To record NSF checks; Accounts receivable ........................................ .. 1,200 Cash ........................................................ ., 1,200 To record automatic loan payment: Notes payable (=$3.320 7 320) ...................... .. 3,000 Interest expense ............................................... ., 320 Cash ........................................................ ., 3,320 P 7-3 Various entries for AIR and Uncollectible Accounts 1. write-offs To record write-off of A/R: Allowance for uncollectible accounts ,,,,,,,,,,,,, ., 35,000 Accounts receivable ............................... .. 35,000 To record collection of A/R that was previously written off: Accounts receivable ........................................ .. 3,000 Allowance for uncollectible accounts ,,,, ., 3,000 (Note: We need to restore the A/R that was mitten ofi'first. ) Cash ................................................................. .. 3,000 Accounts receivable ............................... ., 3,000 2. different methods to estimate bad debts: a. [/5 method: bad debt expense is 3% of credit sale: Bad debt expense 2 $1,750,000 credit sales x 3% = $52,500 Bad debt expense ............................................ ., 52,500 Allowance for uncollectible accounts .... .. 52,500 Note that the balance in Allowance for tincollectible accounts is not readily available. We need to calculate it out! (See question 3’ below. ) b. B/S method: % of A/R We have to calculate the ending balance for A/R first! A/R, before allowance for U. A. ......... ., $462,000 (=$432,000 net + $30,000 allowance) Credit sales .......................................... ., 1,750,000 Collection ............................................ ..(1,830,000) Write—offs ...................................... .. (35,000) Collection of accounts written off ....... ., 0 (23,000 restore 7 3,000 collection) A/R, ending balance before adjustment $347,000 We also need to know the balance of Allowance for uncollectible accounts before the bad debt adjustment: BB ....................................................... .. $30,000 Write—offs .................................. .. (35,000) Restore of accounts written off .... .. 3,000 Balance before adjustment .................. ,. $0,000) Note that the Allowance has (1 debit balanch Allowance for uncollectible accounts needs/a balance of $347,000 A/R x 10% = $34,700 Desired balance for Allowance for uncollectible accounts $34,782 Allowance for uncollectible accounts Bal. b/f adj. $2,000 , AC1]. needed = $34,700+2,000 = $36,700 Desired EB $34,700 Bad debt expense ............................................ .. 36,700 Allowance for uncollectible accounts .... .. 36,700 Allowance for uncollectible accounts needs a balance of; $347,000 x 65% (0—60 days age group) x 4% ..................... H $9,022 $347,000 x 20% (61—90 days age group) x 15% ................. N 10,410 $347,000 x 10% (91 to 120 days age group) x 25% ........... N 8,675 $347,000 x 5% (over 120 days age group) x 40% .............. .. w Desired balance for Allowance for uncollectible accounts $35,047 Allowance for uncollectible accounts Bal. b/f adj. $2,000 , AC1]. needed = $35,047+2,000 = $37,047 Desired EB $35,047 Bad debt expense ............................................ .. 37,047 Allowance for uncollectible accounts ,,,, .. 37,047 3. AIR net to be recorded on balance sheet: (a) Balance in Allowance for uncollectible accounts 2 ($2,000) debit balance + $52,500 = $50,500 Allowance for uncollectible accounts Bal. b/f adj. $2,000 Bad debt 52,500 EB $50,500 (=52,500 — 2,000) 6 A/R (net) = $347,000 AIR 7 Allowance for Uncollectible Accounts $50,500 = $296,500 (b) A/R (net) 2 $347,000 A/R 7 Allowance for Uncollectible Accounts $34,700 = $312,300 (c) A/R (net) 2 $347,000 A/R — Allowance for Uncollectible Accounts $35,047 = $31 1,953 The following are not reguired homework problems: E 7-13 1. a Note that is write off of A/R is recorded as: Allowance for uncollectible accounts $$$ 9 reduce Allowance A/R $$$ 9 reduce A/R Note that this entry does not affect A/R (net), net income, or cash flows 2. a Desired ending balance for Allowance account: $120,000 x 1% + $90,000 x 2% + $100,000 x 6% = $9,000 All the other information given is irrelevant! 3. a BB = 90,000 EB = 100,000 Increase in Allowance = 10,000; but bad debt expense is 16,000. The amount written off must be 16,000 7 10,000 = 6,000 It‘s easier to see the changes through a T—account: Allowance for uncollectible accounts Write off: 90,000 + 16,000 7 100,000 = 6,000 BB 90,000 Bad debt 16,000 EB 100,000 4. a Bad debt expense = $9,000,000 x 2% = $180,000 Ending balance for Allowance for Uncollectible Accounts = BB $260,000 7 write off $325,000 + bad debt 180,000 2 1 15,000 E 7-18 1. (1 It’s a sale of receivable without recourse, All the risks and benefits have been transferred to Ross Bank. E 7-23 1, c. The allowance method records bad debt expense systematically as a percentage of either sales or the level of accounts receivable, 2, d. If a company uses the allowance method, the write-off of a receivable has no effect on total assets. Thejournal entry involves a debit to the allowance account and a credit to accounts receivable The net effect is that the asset section is both debited and credited for the same amount. Thus, there will be no effect on either total assets 01' net income 3. c. The entry is to debit bad debt expense and credit the allowance account. Net credit sales were $1,500,000 ($1,800,000 — $125,000 ofdiscounts — $175,000 of returns). Thus, the expected bad debt expense is $22,500 (1.5% x $1,500,000). This amount is recorded regardless of the balance remaining in the allowance account from previous periods. The net effect is that the allowance account is increased by $22,500. ...
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This note was uploaded on 11/28/2009 for the course BUSINESS acct 3211 taught by Professor Lin during the Winter '09 term at Calhoun Community College.

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HMsolotion-ch7 - Chapter 7 Homework Solution and etc. E7-3...

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