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Homeworksolution-ch.7

Homeworksolution-ch.7 - EXERCISE 7-8(5-10 minutes(a...

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EXERCISE 7-8 (5-10 minutes) (a) Allowance for Doubtful Accounts ........ 6,000 Accounts Receivable ................... 6,000 (b) Before After Write-off Write-off Accounts Receivable (Book Value) $ 800,000 $ 794,000 Allowance for Doubtful Accounts 47,000 41,000 Net Realizable Value $ 753,000 $ 753,000
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EXERCISE 7-14 (20-25 minutes) (a) Interest bearing note – Option 1: September 30, 2007 Note Receivable ......................................... 35,000 Accounts Receivable ....................... 35,000 December 31, 2007 Interest Receivable ................................... 700 Interest Revenue ............................... 700 ($35,000 X 8% X 3/12) September 30, 2008 Cash ........................................................... 37,800 Interest Receivable ........................... 700 Interest Revenue ............................... 2,100 Note Receivable ................................ 35,000 ($35,000 X 8% X 9/12) (b) Noninterest bearing note – Option 2: September 30, 2007 Note Receivable ......................................... 37,800 Discount on Notes Receivable ....... 2,800 Accounts Receivable ....................... 35,000 December 31, 2007 Discount on Notes Receivable ................. 700 Interest Revenue ............................... 700 ($35,000 X 8% X 3/12) September 30, 2008 Discount on Notes Receivable ................. 2,100 Interest Revenue ............................... 2,100 ($35,000 X 8% X 9/12) Cash ........................................................... 37,800 Note Receivable ................................ 37,800
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EXERCISE 7-14 (Continued) (a) There is no difference in the amounts because both options bear interest at 8%. The “noninterest bearing” note has the interest included in the face amount of the note and is journalized to account for this. The actual interest received is the same under both options. (b) The liquidity of Amirkal Corp. at December 31, 2007 will remain unchanged whichever option is selected. Under option 1, the note balance remains at $35,000 but interest receivable of $700 result in a total of $35,700 under current assets. Under Option 2, the balance of the note, after the recording of the amortization on the discount is also $35,700. The cash flows will also be the same under both options as the amount collected at the maturity of the note is $37,800.
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EXERCISE 7-15 (30-35 minutes) 1. Notes Receivable ................................ 1,101,460 Discount on Notes Receivable. 401,460 Land ............................................ 590,000 Gain on Sale of Land ................. 110,000 ($700,000 – $590,000) $1,101,460 Face value of note .63552 Present value of 1 for 4 periods at 12% 700,000 Present value of note 1,101,460 Face value of note $ 401,460 Discount on note receivable Using a financial calculator: PV ? yields $(699,998) I 12% N 4 PMT - FV $ 1,101,460 Type 0 Excel formula: =PV(rate,nper,pmt,fv,type)
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EXERCISE 7-15 (Continued) 2. Notes Receivable ................................ 400,000 Discount on Notes Receivable. 178,836 Service Revenue ........................ 221,164 Calculation of the present value of the note: Maturity value 400,000 Present value of $400,000 due in 8 years at 12%—$400,000 X .40388 $161,552 Present value of $12,000 payable annually for 8 years at 12% annually—$12,000 X 4.96764 59,612 Present value of the note and and interest 221,164 Discount $178,836 Using a financial calculator: PV ? Yields $ (221,165) I 12% N 8 PMT $ 12,000 FV $ 400,000 Type 0 Excel formula: =PV(rate,nper,pmt,fv,type)
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EXERCISE 7-15 (Continued) 3.
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